Possible Role of a Clearing House in the Latin American Regional Market

This report was prepared at the request of the Center for Latin American Monetary Studies (CEMLA) of Mexico City, as a result of discussions held at its Seventh Operational Meeting in September 1962. That meeting considered, among other things, the establishment of special mechanisms to facilitate and expedite payments in the Latin American area. The principal documents used as a basis for those discussions were “Structure and Operation of the Central American Clearing House,” by Mr. Jorge González del Valle, “A Clearing House and Payments Union for Latin America,” by Professor Robert Triffin, and “The Financing of Intra-LAFTA Trade: Some Problems and Possible Approaches to Their Solution,” by Professors Raymond Mikesell and Barry N. Siegel. At the end of its discussion, the CEMLA meeting adopted a recommendation inviting further studies on mechanisms that would facilitate intra-area payments.

Abstract

This report was prepared at the request of the Center for Latin American Monetary Studies (CEMLA) of Mexico City, as a result of discussions held at its Seventh Operational Meeting in September 1962. That meeting considered, among other things, the establishment of special mechanisms to facilitate and expedite payments in the Latin American area. The principal documents used as a basis for those discussions were “Structure and Operation of the Central American Clearing House,” by Mr. Jorge González del Valle, “A Clearing House and Payments Union for Latin America,” by Professor Robert Triffin, and “The Financing of Intra-LAFTA Trade: Some Problems and Possible Approaches to Their Solution,” by Professors Raymond Mikesell and Barry N. Siegel. At the end of its discussion, the CEMLA meeting adopted a recommendation inviting further studies on mechanisms that would facilitate intra-area payments.

This report was prepared at the request of the Center for Latin American Monetary Studies (CEMLA) of Mexico City, as a result of discussions held at its Seventh Operational Meeting in September 1962. That meeting considered, among other things, the establishment of special mechanisms to facilitate and expedite payments in the Latin American area. The principal documents used as a basis for those discussions were “Structure and Operation of the Central American Clearing House,” by Mr. Jorge González del Valle, “A Clearing House and Payments Union for Latin America,” by Professor Robert Triffin, and “The Financing of Intra-LAFTA Trade: Some Problems and Possible Approaches to Their Solution,” by Professors Raymond Mikesell and Barry N. Siegel. At the end of its discussion, the CEMLA meeting adopted a recommendation inviting further studies on mechanisms that would facilitate intra-area payments.

The authors of the present report spent several weeks in the field, making on-the-spot surveys in a number of Latin American countries. They had discussions with officials of various regional institutions and of the central banks and Ministries of Finance of the countries visited, and with private bankers, Chambers of Commerce, Associations of Importers and Exporters, and other parties interested in Latin American trade and payments.

Introduction

FOR THE PURPOSE of this report, a Clearing House is defined as an international association based on the cooperation of central banks or similar monetary authorities, which would clear all or some payments among the participating countries. It is further assumed that a Clearing House may be organized either with a minimum of credit facilities or with a considerable amount. Although it is difficult to visualize a Clearing House that does not extend any credit at all, a clear distinction can be drawn between one type in which the credit element is marginal, and another in which it is intended to play a major role. In the former, the main objective would be to achieve an improved payments technique. In the latter, the Clearing House would, in addition, aim at producing an economic impact through the conditions attached to the apportionment and the subsequent repayment of an available amount of credit. Considerable attention is being paid in the Latin American area to the technical merits of a Clearing House. The major interest in such an institution, however, appears to lie in the contribution that it is expected to make as a provider of credit. In this report, no judgment as to which Latin American countries might or might not be interested in negotiating the establishment of such an institution is attempted. Some types of Clearing House (normally the ones extending considerable credit) are sometimes referred to as Payments Unions; others are described as Special Agencies. Both varieties will be subsumed under the definition given above.

Section I of this report contains a brief summary of earlier discussions of special payments arrangements for the Latin American area. Sections II, III, and IV are devoted to the ideas most prominent in recent deliberations: the Central American Clearing House as a possible prototype for an organization serving a wider area; a proposal by Professor Triffin, submitted at the Seventh Operational Meeting of the Center for Latin American Monetary Studies (CEMLA), in September 1962, and suggestions for Latin American cooperation based on the principle of reciprocity.

Section V covers some of the comments heard in the Latin American area, giving first the principal arguments advanced by those who believe that a special payments arrangement is useful, and then the reasons why others regard such a scheme as unnecessary or objectionable. A number of important factors that have been mentioned as major impediments to the development of intra-Latin American trade are also brought out; they present problems which would remain to be solved even if the establishment of a Clearing House should help to overcome other difficulties.

Sections VI and VII form the principal analytical part of the report. Section VI focuses on the possible advantages and disadvantages of a Clearing House essentially organized to improve payments techniques. Section VII deals with similar aspects of a Clearing House intended to mobilize significant amounts of credit.

Since frequent references to the European experience in the 1950’s are found in discussions of Latin American payments arrangements, Section VIII compares the European situation at the time of the European Payments Union with that presently existing in the Latin American area.

I. Earlier Discussions of Payments Arrangements for the Latin American Area

Recent attempts to reach an understanding on specific payments arrangements serving Latin America date back to 1956. The Trade Committee of the Economic Commission for Latin America (ECLA), meeting for the first time in Santiago in November 1956, studied ways and means to reorganize and simplify the rigid system of bilateral payments arrangements then existing in the area. The Committee invited the central banks or similar monetary authorities of the countries concerned to set up a working group which would study the possibility of gradually establishing a multilateral payments regime. At the same time, the Committee formulated certain suggestions of its own, intended to pave the way for greater cooperation among Latin American countries in the payments field.

In response to the Committee’s suggestions, the first meeting of the Working Group of Central Banks was held in Montevideo in April and May 1957. Its principal result was the drafting of a standard bilateral payments agreement as a preliminary to the establishment of transferability for agreement balances. The standard agreement was subsequently adopted by Argentina, Bolivia, Chile, and Uruguay.

The Seventh Meeting of ECLA, held in La Paz in May 1957, and the First Meeting of Experts on a Regional Market, held in Santiago in February 1958, both underscored the need for multilateralization of intra-Latin American payments, but did not reach concrete conclusions.

The second meeting of the Working Group of Central Banks, held in Rio de Janeiro in December 1958, reached agreement on a draft protocol concerning the multilateralization of bilateral agreement balances, which was submitted to the Trade Committee for approval. The protocol provided for automatic first category compensations (i.e., an offsetting operation involving three or more payments agreements, leading to a reduction of all balances concerned), and nonautomatic second category compensations (i.e., an operation involving the transfer of a balance from one bilateral agreement account to another). It was intended that the ECLA Secretariat should act as Agent for the compensations.

The draft protocol, agreed upon in Rio de Janeiro, came up for discussion at the second meeting of the Trade Committee, held in Panama in May 1959. At that meeting, however, priority was given to the proposal for the establishment of a free trade area, submitted by Argentina, Brazil, Chile, and Uruguay. No official action was taken on the Rio protocol (although a few compensations were subsequently effected on an ad hoc basis), and the payments discussion became part of the negotiations on the free trade area.

In September 1959, the first session of the Intergovernmental Conference for the Establishment of a Free Trade Area was held in Montevideo, and a draft text incorporating the main provisions for a Latin American Free Trade Area was adopted. No agreement was reached, however, on any payments arrangements that might attend the establishment of a free trade area; a meeting of representatives of central banks, to be convened in Montevideo in January 1960, was to deal especially with this subject.

At the January 1960 meeting, ECLA suggested the creation of a Special Agency through which intra-area payments would be channeled. Member countries would grant each other mutual credits. Technically, ECLA offered a choice between a system of “a priori credits” or one of “a posteriori credits.” The former system would be superimposed on a regime of automatic multilateral compensations, carried out in respect of payments prescribed to be effected through the Agency. Under the latter system, payments would continue to be made in U.S. dollars, but the surplus countries would be required to grant back their net dollar earnings from intra-area trade to the Agency, which in turn would lend these dollar funds to the deficit countries.

No agreement was reached on these proposals. The meeting of representatives of central banks concluded that the objective to be sought in the field of payments was free convertibility, that the existence of different payments systems in the region did not present an obstacle to the entry into operation of the free trade area agreement, and that any discriminatory treatment that might result from different payments systems should be avoided. The conference recommended further study of the subject of payments systems. Accordingly, the second session of the Intergovernmental Conference for the Establishment of a Latin American Free Trade Area, meeting in Montevideo in February 1960, did not discuss any payments problems. It approved the Treaty of Montevideo, which established the Latin American Free Trade Association, but the Treaty itself did not contain any payments provisions. A resolution, attached to the Treaty, called for further studies on credits and payments that might facilitate the financing of transactions in the area and thereby help to achieve the Treaty’s objectives.

After February 1960, attention temporarily veered away from payments arrangements intended to serve the Latin American area. For about two and one half years, interest focused increasingly on the mobilization of export credits, primarily to finance the sale of Latin American manufactured products within the area. In the meantime, the technique of intra-Latin American payments underwent considerable change. The network of bilateral payments agreements, covering part of the area, which earlier proposals had sought to multilateralize, was almost entirely liquidated. Of the 14 bilateral payments agreements reported to be functioning in 1958, only 1 (between Argentina and Uruguay) continued in operation by the end of 1962. This remaining arrangement is scheduled for liquidation, pending agreement between the two countries about the repayment of the outstanding balance.

A positive step in the establishment of a regional payments mechanism was taken when the central banks of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, in July 1961, signed an Agreement creating the Central American Clearing House. The Agreement entered into force on August 12, 1961 upon ratification by the central banks of El Salvador, Guatemala, and Honduras, and became operative on October 1, 1961.

The problem of payments arrangements affecting the Latin American area was again brought to the fore at the CEMLA meeting in September 1962. The exchange of ideas that took place at that meeting1 led to the recommendation that CEMLA should further study the problem and consult others on it. The payments problems were also referred to in a paper submitted by the ECLA Secretariat to the Tenth ECLA Meeting2 held at Mar del Plata in May 1963, but on that occasion the subject was not discussed and no resolutions were adopted.

II. Central American Clearing House

A description of the initial experience gained with the Central American multilateral clearing, and of the principles and mechanisms involved in the Clearing House techniques, was contained in a study, “Structure and Operation of the Central American Clearing House,” by Mr. Jorge González del Valle, submitted to the September 1962 meeting of CEMLA. A covering note to the study stated that it would lend itself to a comparison of the Central American experience with the possible role of similar organizations that might serve a broader group of Latin American countries.

The present section describes the principal aspects of the technique applied by the Central American Clearing House. It covers the manner of channeling payments through the Clearing House; the registration of claims and debts by the Clearing House; the technique of settlement; exchange rate guarantees; Central American checks; and certain legal aspects.

Payments through the Clearing House

The Agreement establishing the Central American Clearing House does not call for compulsory channeling of payments through the Clearing House. The only commitment affecting the payments technique—and this, only in general terms—is that the central banks undertake to promote the greatest use of Central American currencies (Articles 1 and 31). The degree and manner of channeling payments through the clearing is left to the member countries, which implement it in different ways.

Of the four participating countries (El Salvador, Guatemala, Honduras, and Nicaragua),3 two (El Salvador and Guatemala) maintain some exchange restrictions that affect the operations of the Clearing House. Under Article 29 of the Agreement, countries with exchange restrictions are to adopt measures to facilitate the functioning of the Clearing House, and the central banks of the other participants are to cooperate in ensuring observance of these measures. In accordance with this provision, two agreements have been concluded, dealing with payments in Salvadoran colones and in Guatemalan quetzales, respectively.4

Checks or payments instructions issued in El Salvador and Guatemala will not be acceptable through the Clearing House unless they bear the stamp of the respective exchange control authorities, certifying that they have been issued in accordance with existing exchange regulations. Furthermore, El Salvador and Guatemala specify the maximum amount of their banknotes that other central banks are permitted to present for settlement through the clearing during each calendar month. (Nicaragua has not accepted its own banknotes through the clearing, but this limitation is expected to be eliminated shortly.) Except for certain transactions that are excluded from settlement through the Clearing House (i.e., those inconsistent with its exchange control regulations), El Salvador and Guatemala prescribe that all permissible payments to the other participants shall be channeled through the Clearing House.

In the absence of prescription-of-currency regulations, debtors in any of the participating countries making payments to creditors in other participating countries have an option whether or not to pass them through the Clearing House. If the authorities nevertheless want to stimulate recourse to the clearing, there must obviously be advantages offered by the Clearing House technique that will induce debtors not to use other available payments channels. Debtors will probably be encouraged to make payments in their own currencies (which will then pass through the Clearing House) instead of in U.S. dollars (as was the normal procedure prior to the establishment of the Clearing House), if the former method offers to them certain advantages over the latter (being cheaper, speedier, etc.). This aspect is dealt with in more detail below (p. 415). In addition, when payment through the Clearing House is optional, the authorities have to publicize its services to assure that businessmen are aware of its facilities.

Since the Clearing House Agreement does not exclude other methods of payment among the participants, the clearing covers less than 100 per cent of the transactions taking place. It was estimated that in 1962 the value of transactions through the Clearing House represented about 57 per cent of total intraregional visible trade. This percentage rises to 64 if Costa Rican imports from the other participants are excluded from the total trade figure, because the Clearing House during 1962 did not handle payments in Costa Rican colones.

The transactions settled outside the Clearing House include three main groups: “border trade”5 paid in banknotes not subsequently returned to the country of issue through the Clearing House, payments made in U.S. dollars in accordance with pre-existing practices, and payments in respect of transactions involving financing by U.S. banks.

A sizable part of intra-area trade is settled directly in banknotes. The banknotes of the countries involved circulate to a certain extent outside the borders of the issuing country. It must be assumed that part of these find their way back to the country of origin in payment for trade transactions in the opposite direction. The remainder is gradually sold to banks in the recipient country, and only this latter part is now channeled through the clearing.

Payment in banknotes began to raise problems after El Salvador introduced controls over capital movements. Previously, El Salvador had freely accepted repatriation of its own banknotes. During the early months of the Clearing House, it became clear that continuation of this practice would frustrate El Salvador’s attempt to check capital flight, since unauthorized capital transactions were being carried out by means of the export of banknotes. The complete refusal by El Salvador to accept its banknotes through the clearing would have upset well-established border trade. The participants in the Clearing House therefore agreed that the central bank of El Salvador would accept from each of the other central banks, for settlement through the clearing, an amount of banknotes not exceeding ₡ 500,000 a month. When, subsequently, Guatemala introduced similar capital controls, the amount of Guatemalan banknotes returnable by each of the other central banks through the clearing was fixed at Q 300,000 a month. The technique for handling these monthly quotas was left to the central banks of the recipient countries. For some time, there developed in Honduras a parallel market for Salvadoran and Guatemalan banknotes that could not be accommodated within the monthly quotas. Speculation against the two currencies, however, receded within a few months, and since then the official monthly quotas have been adequate.

Registration of claims and debts

Of the payments channeled through the Clearing House, about two thirds are by check and slightly less than one third in banknotes. The payments are registered by the Clearing House in accordance with the following procedure.

For payments made through the banking system, the debtor in participating country A will normally draw a check on his own domestic bank account and forward it directly to his creditor in participating country B. These checks are made out in the debtor’s currency. This establishes the greatest possible similarity between domestic payments and payments within the Clearing House area which, in the view of the authorities, will be conducive to the economic integration that the countries are striving for.

The payee in country B will send the check to his bank, as he would domestic checks received by him. His bank will send the check to its central bank for clearing purposes. The central bank will combine the checks issued in each of the other participating countries and send them to the central bank of the respective country. The latter will collect the checks at the drawee banks, and when payment is received will so advise the remitting central bank and the Clearing House. The Clearing House will pass final debit and credit entries to the accounts of the two central banks involved only upon receipt of this notice of payment, although a preliminary notice, showing the particulars of each shipment, will be sent to it by the remitting central bank at the time of each remittance.

When payments are effected in banknotes and coins, the central bank of country B will return to the central bank of country A the latter’s currency which it has acquired from its local banks. Immediately upon receipt of notice of the arrival of such a shipment from central bank A, the Clearing House will debit the account of central bank A and credit that of central bank B. The Clearing House does not physically handle either checks or banknotes.

Finally, in urgent cases, payments may be effected by telegraphic transfers. Such transfers are arranged directly by commercial banks with their correspondents in the other participating countries, but they are settled through the Clearing House. Where no correspondent relationships between banks in the two countries exist, telegraphic payments can be made by the central banks acting on behalf of the commercial banks. In either case, the Clearing House must be advised immediately so that it can promptly carry out the necessary operations on its accounts.

Settlement procedures

The subscription that each participating country makes to the Clearing House amounts to the equivalent of US$300,000. Of this, $75,000 is paid in U.S. dollars; these contributions constitute the Guarantee Fund. The remaining part of the subscription is in local currency and constitutes a book claim of the Clearing House on the member central banks. These local currency subscriptions form the Operations Fund.

Each country’s local currency contribution is debited to the operational account which the Clearing House opens for each central bank, before any other transactions are registered in the account. Thereafter, each central bank’s account is debited for the payments made by the residents of that country through the Clearing House to the residents of the other participating countries, and is credited with all payments made in the opposite direction. It follows that the Clearing House does not keep its records in terms of bilateral claims and debts. The balance of an operational account at any time shows the compensated position of each central bank vis-à-vis the remainder of the group. This compensation is effected automatically as each transaction is entered. No account will show a net credit balance until the total net credits recorded in it from intra-area transactions exceed the original local currency subscription.

This technique assures implementation of the rule that each participant grants to the Clearing House an automatic operational credit equivalent to its subscription to the Operations Fund, i.e., the equivalent of $225,000. Central banks have no right to request settlement of a net claim not exceeding the above subscription (i.e., as long as their accounts do not register a net credit balance). Conversely, any net credits in excess of the subscription are subject to prompt settlement in U.S. dollars at the request of the creditor concerned. The Agreement thus limits the amount of credit that each participant is required to make available to the Clearing House. As a maximum, the total amount of credit available to the Clearing House, therefore, is $225,000 multiplied by the number of countries holding net claims. As there were four participating countries, the maximum number of possible creditor positions was three, and the maximum amount of credit (which would in that case be available to one debtor country) was $675,000. The Agreement does not fix a minimum amount of credit to which debtors are entitled separately or jointly. The debtor countries have to share the total credit that happens to be available at any point of time.

A few complications should be noted. According to the Agreement, dollar settlements to a creditor are to be met by the Clearing House from the Guarantee Fund (Article 12), while the debtor countries are required to replenish, in proportion to their outstanding debts, the dollars thus disbursed (Article 13). So far, the Clearing House has not used the dollars of the Guarantee Fund for settlements, since the total amount available ($300,000) proved inadequate for the purpose. Instead, it has requested debtor countries to make direct dollar settlements with the creditor country or countries.

Furthermore, the participating central banks have agreed that no settlement shall be made unless the amount by which a creditor country’s claims exceed its local currency subscription is equivalent to at least $100,000. When this condition is met, the full amount of the excess over $225,000 will be subject to settlement. Moreover, the Central Bank of Honduras, which has been a regular and substantial creditor, has given standing instructions that its position be calculated every Friday. In this manner, settlements have tended to be made on a weekly basis.

Exchange rate guarantee

The Clearing House records its transactions in a unit of account, called the Central American peso ($CA), equivalent to US$1.00. Each participant must declare to the Clearing House its rate of exchange at the time of ratification, as well as any change or changes in the rate introduced thereafter.

The Agreement contains two general provisions on exchange rate guarantees: If a country changes its declared rate of exchange, its central bank shall readjust its local currency subscription so as to keep the working capital of the Clearing House intact (Article 7). This means that the local currency subscription represents a fixed dollar value. Furthermore, the central banks guarantee convertibility into U.S. dollars of the debit balances recorded on their accounts held at the Clearing House (in $CA), in excess of the contribution in their own currency (i.e., the local currency subscription which is not claimable), at the last rate of exchange declared (Article 8).

These provisions have been amplified by subsequent agreements. In accordance with Article 8 of the by-laws, all remittances in transit between central banks on the day of official notice of a change in an exchange rate shall be accepted and paid at the rate effective prior to the change. This guarantee has since been extended to the in-transit items held by the commercial banks. Hence, the commercial banks are covered by the exchange guarantee as soon as they receive items scheduled to pass through the clearing.

Central American checks

The participating central banks have signed (but not yet ratified) a protocol creating a Central American check. This instrument is intended to make available a facility, at a uniform and moderate cost, to all who have to make payments in the area, and in particular to those who do not hold checking accounts and are little conversant with banking practices. It may also serve as a travelers check.

The Central American check will be issued by the commercial banks in each participating country, as agents of their central bank; and immediately upon issuance it will be debited to the commercial bank’s account with the central bank. The check will hence be an obligation of the central bank of the issuing country. The check will be drawn in the local currency of the country of origin, and will be accepted at par by banks in the area, which will collect it through the clearing via their respective central banks. The issuing commercial banks will receive a commission of one fourth of 1 per cent, with a minimum of $CA 0.20 and a maximum of $CA 25.00.

Legal aspects

The legal position of claims and debts arising on the books of the Central American Clearing House is not entirely clear. As explained previously, the Clearing House disregards the bilateral aspects of debts and claims among its members, and registers the net balances indicating the over-all position of each central bank vis-à-vis the remainder of the group. The Clearing House is committed to meet settlements to creditors from its Guarantee Fund (Article 12). The debtors are then obliged to bring the Guarantee Fund back to its preexisting level (Article 13). This seems to indicate that the Clearing House substitutes itself as a debtor toward the creditors, and as a creditor toward the debtors. It implies that the compensation technique applied cancels the bilateral relationship between debtors and creditors, and creates novation. Debtors have to make settlements in proportion to their over-all indebtedness, and a particular debtor may well find himself contributing to a dollar settlement to a creditor, even though bilaterally he holds a claim on the latter. In this context, it is noted that the Central American Clearing House Agreement contains no provision conferring juridical personality on the Clearing House. As stated above, the Guarantee Fund has not been used so far to make payments to creditors, because it has generally fallen short of the amount of settlements to be made. The Guarantee Fund remains available as a first pledge against creditors’ outstanding claims.

There are no substantive rules governing the dissolution of the Clearing House. The conditions under which it would liquidate its operations are to be determined by the Board of Directors. The latter, consisting of a representative of each central bank, has a quorum of three, and its decisions are determined by a majority of votes.

III. Professor Triffin’s Proposal

Professor Triffin submitted to the CEMLA meeting in September 1962 a paper, “A Latin American Clearing House and Payments Union.” In this paper, he warns his readers that the suggestions are not intended to be complete or definitive, and that a large amount of additional information and exploration will be required before negotiations for an agreement can be attempted. This section summarizes the main features of the paper and some of the suggestions regarding Clearing House credit.

Triffin starts with the proposition that, historically, Latin American trade has been preponderantly with the industrial countries of Europe and with the United States, while opportunities for trade between the countries of the area have been neglected. He urges that the obstacles to intra-Latin American trade be reduced for the benefit of all parties concerned, so as to make better use of the special advantages of each country and of the economies of large-scale activity, and thus increase production to the maximum, reduce costs, and satisfy investment and consumer demand. In his view, however, it cannot be expected that mere reciprocity in trade concessions will suffice to achieve that aim. He cites the experience of the Organization for European Economic Cooperation (OEEC) as proof that trade arrangements are intimately connected with similar arrangements in the financial and monetary field. The best way to promote progress in this general direction is to adopt a gradual, experimental method. The following tentative steps are suggested in his paper.

First of all, the Latin American central banks might set up among themselves a Clearing House which would compensate on a multilateral basis the deficits and surpluses of each country with the other members of the group. In its least ambitious version, the Clearing House would not have to include any credit facilities, since it could conceivably function on the basis of total and immediate settlement in convertible currencies of the net balances of each country remaining after compensation. Such a procedure, he suggests, would reduce settlement costs. The system’s contributions would, however, become much more important if it did provide credit facilities.

Triffin describes various credit procedures, which need not be introduced all at the same time. First, the participating countries could extend to one another mutual interim credit by postponing settlement of net clearing balances to the end of each month. The maximum credit to be given and to be received by each country during the course of a month should not exceed a certain amount to be agreed in advance.

Secondly, the Clearing House could use a working fund of convertible currencies to which each participant would contribute an agreed percentage of its currency reserves. The working fund would make it possible for the Clearing House to make immediate settlements in favor of creditor central banks that exceeded their lending ceiling before the end of a monthly accounting period. It would, furthermore, enable the Clearing House to provide automatic financing, at the request of a debtor, of all or part of the latter’s end-of-the-month debt to the Clearing House, up to an amount not exceeding the debtor’s contribution to the working fund. The principal aim of this facility, which is intended to be available for a period up to 12 months, would be to provide time for the arrangement of nonautomatic credits. The working fund could conceivably be supplemented by such outside resources as the Clearing House might be able to attract. If the volume of such supplementary funds were sufficient, the Clearing House might consider the desirability of extending financing in support of stabilization programs. For this purpose, it should cooperate closely with the International Monetary Fund.

In addition, the participating central banks could deposit with the Clearing House part of their gold and exchange reserves over and above the agreed minimum percentage referred to above. It is not clear, however, what inducement would exist for such additional deposits, nor what specific purpose they would serve other than to strengthen the over-all resources of the Clearing House.

Triffin emphasizes that all credit arrangements should be of a multilateral nature. Countries would not be obliged to bring their intra-area trade into equilibrium, nor would they have to achieve any bilateral trade equilibria. The Clearing House would not establish creditor and debtor relations among the participants, but only between each participating central bank and itself. Those relations should not be affected by changes in the exchange rates of member countries, and should be protected from any present or future limitation on the convertibility of the liabilities of the debtor countries.

The Clearing House would carry on its bookkeeping in a unit of account, described as the Latin American dollar, which would be at par with the U.S. dollar. Central banks would undertake to encourage the use of Latin American dollar settlements in transactions among the participants, but the clearing technique would not have to be based on mandatory centralization by each country of all foreign exchange transactions with the group. During the discussion following the presentation of his paper, Triffin emphasized that each potential user of the services of the Clearing House would be absolutely free to go through the clearing or to bypass it.

The central banks would sell at par to their residents (probably through their commercial banks, although Triffin does not specifically say so), against payment in local currency, Latin American dollar drafts for the settlement of any debts to the residents of other participant countries, and would similarly buy at par such drafts presented to them for payment. They would make arrangements to reduce to an agreed minimum any banking charges or commissions on the purchase and sale of Latin American dollar drafts by the commercial banks. Triffin implies that each participant should declare to the Clearing House a par value for its currency even where exchange rates have recently been allowed to fluctuate in a free market, but does not engage in a detailed discussion of the exchange rate problem.

As far as mutual credits for the purpose of interim financing are concerned, Triffin tentatively suggests that the Clearing House extend to each central bank a credit margin of one fourth or one sixth of its country’s imports from the other participating countries during the preceding year. On the basis of the latest available trade figures for 19 Latin American republics (including projections from partial data), assuming participation of this group, and taking one sixth and one fourth as the lower and the upper limits of the interim credit to be extended, central banks would obtain from the Clearing House total margins ranging between $124 million and $185 million. The largest recipients would be Brazil ($39-58 million) and Argentina ($25-38 million).

Furthermore, central banks should grant to the Clearing House credits of one third or one half of their countries’ total exports to the group during the preceding year. Under the assumptions referred to above, central banks would extend to the Clearing House total margins ranging between $214 million and $321 million. The biggest credit margin, according to this calculation, would be made available by Venezuela ($57-85 million).

For the working fund, Triffin suggests that participants be asked to contribute 3 per cent of their international reserves, with the possibility that this percentage be subsequently raised to 10 per cent, as and when the need arises. According to his estimates, this would create an initial fund of about $100 million, which might later be increased to $300 million. This means that he assumes that total currency reserves of the group amount to about $3,000 million. At the end of 1962, gross gold and convertible currency reserves of the 19 Latin American countries for which figures are available came to a total of slightly less than $2,000 million. It appears, however, that, for the purpose of the plan, a concept of available reserves would have to be used. If gold and other assets which are pledged to foreign creditors and short-term liabilities (up to one year) of the various central banks in foreign currencies are deducted, the reserves that might be considered available for the purpose of setting up a working fund totaled roughly $1,300 million. Most of this amount (i.e., nearly three fourths) was held by two countries, Mexico and Venezuela. A number of important countries in the area had no net disposable reserves within the concept as defined above.

IV. Principle of Reciprocity

For several years, the Secretariat of ECLA has advocated the adoption of special payments arrangements for the Latin American area, based on the so-called principle of reciprocity. The concepts supporting this principle, and the technical inferences drawn from it, have been explained in various ECLA documents.6 The following is a summary of the main arguments advanced in support of this principle.

The countries of Latin America are committed to the achievement of economic development. One important instrument toward that goal is the establishment of the Latin American Free Trade Association, which the Contracting Parties will attempt to change eventually into a Latin American Common Market. It is expected that, through these arrangements, Latin American countries will attain equal opportunities for expediting their economic growth.

Latin American development, according to ECLA, has been characterized so far by a relatively slow growth of exports, which imposes limitations on the area’s capacity to absorb foreign capital. Moreover, while the tendency of exports is to lag behind the growth of the national product, imports tend to outstrip this growth. Hence, Latin America will be compelled to pursue policies of import substitution and export diversification as intensely as possible. If every country follows this course individually, and if trade continues to flow in accordance with its traditional pattern, the result will be the creation mainly of small industries with low productivity, regardless of the advantages of specialization.

In order to avoid these consequences, ECLA suggests that the principle of reciprocity should be brought into play. A free trade area or a common market would offer an alternative to excessive import substitution, namely, the possibility that each country could develop industrial exports to the other countries of the region, so as to obtain from them certain goods which it would otherwise have been compelled to produce at home. The converse would equally have to apply: a country taking additional imports from the area should be in a position to cover them with its own exports. This would accelerate economic growth and open the road toward industrial specialization and toward realization of the benefits of the economies of scale, while reducing the external vulnerability of the area.

A country’s ability to finance the additional exchange of goods would be a decisive factor in the smooth operation of this scheme. Parity between the advantages which a country effectively offered to the other members of the group and those which it received from them would, therefore, be of crucial significance. Unless the principle were clearly defined at the outset, and unless there were some guarantee that the benefits derived by any one country from the group would be reflected in correlative advantages for the rest of the group, it would not be surprising if some countries hesitated to accede to the scheme or were overcautious in their trade liberalization commitments. This would be an undesirable impediment to Latin American development.

To implement the principle of reciprocity, countries with a persistent credit balance would be under an obligation to expedite their liberalization measures. But some time would generally elapse before a decision to apply such measures could be adopted, since the disequilibrium might prove to be temporary and consequently not call for major readjustments. Similarly, should the application of broader liberalization measures prove advisable, it would be some time before their effect would make itself felt. Meanwhile, debtor countries would find themselves compelled to use their dollar reserves to cover their commitments to creditor countries.

In the view of ECLA, therefore, the principle of reciprocity cannot be properly applied in the absence of a payments arrangement. The risk of a loss of dollar reserves is regarded as a deterrent to trade liberalization. Faced with this risk, countries are believed to be reluctant to assume as sweeping commitments to liberalize as they would if the risk were minimized by a satisfactory system of multilateral credits. Accordingly, the greater the facilities provided by such a system, the further would the participating countries be likely to carry the preferential trade liberalization.

On the basis of the above argument, ECLA has continued to suggest various payments techniques, adapted to the changing pattern of intra-Latin American settlements. Initially, ECLA sought to achieve the gradual multilateralization of payments, which then were largely flowing through bilateral channels. As bilateral payments agreements among Latin American countries were increasingly abandoned, the suggested technique shifted. All the while, ECLA attempted to devise a system that might accommodate both the countries that preferred intra-area settlements on a soft currency basis and those accustomed to making and receiving payments in U.S. dollars. It was argued that the latter group of countries had no reason to stay outside a common payments system, since it was clear that their future industrialization would call for the expansion of trade beyond the narrow bounds set by each one’s individual market.

ECLA’s most recent technical suggestions, formulated prior to the conclusion of the Treaty of Montevideo and making provisions for a priori and a posteriori credits, were briefly referred to in Section I of this report. Various technical implications of the principle of reciprocity will be discussed later.

V. Sampling of Latin American Views

Existing system

It is clear that current discussions about the desirability of establishing a Latin American Clearing House stem from dissatisfaction with the operation of existing payments arrangements in Latin America.

Today, most transactions among Latin American countries are settled in U.S. dollars through U.S. banks. The U.S. banks primarily engaged in these settlements are located in New York, San Francisco, and New Orleans. The extent of their activities varies. In some cases, Latin American banks can draw on lines of credit placed at their disposal by U.S. banks for purposes connected with intra-Latin American trade. Some Mexican bankers have stated that their U.S. dollar credit lines are quite ample, and that they would have no difficulty in increasing them if the need arose. U.S. banks frequently open letters of credit for Latin American importers or their banks, or accept drafts on their behalf. They confirm letters of credit opened by banks in Latin American importing countries. They carry out payments instructions, given by cable or by mail, to debit an account held with them by one Latin American bank in favor of an account held by another Latin American bank either with the same or with a different U.S. bank. On the whole, Latin American banks only infrequently hold accounts with one another, although they do maintain correspondent relations. As a rule, there is no direct channel through which payments pass directly from one Latin American country to another, and payments in U.S. dollars through U.S. banks are the normal procedure.

There are a few exceptions to the above rule. In Central America, payments in banknotes play a considerable role, and the same holds true, to some extent, for border trade between adjacent countries elsewhere in the area. In Central America, also, the volume of payments in U.S. dollars has recently been reduced, owing to the operation of the Central American Clearing House. Some transactions between Argentina and Uruguay continue to be channeled through a bilateral agreement, but this agreement is scheduled for liquidation. There reportedly exist certain cruzeiro accounts of Argentine banks in Brazil, which are used for payments in connection with fruit imports and exports between the two countries. Some exports from Paraguay to Argentina are reported to be paid for in Argentine pesos. Sporadically, banks in one Latin American country hold local currency accounts with banks in another country, but the general impression is that this practice is exceptional and insignificant. Some settlements among Latin American countries are said to take place in sterling or other convertible non-dollar currencies. Despite these marginal deviations, it holds true that the normal method of settlement for intra-Latin American transactions is through U.S. banks. The following subsections contain a variety of opinions of Latin American officials, bankers, and businessmen. No attempt will be made here to evaluate these opinions.

Case for a Clearing House

Proponents of the introduction of a Clearing House system hold (1) that existing payments arrangements impede the attainment of certain important policy objectives, and (2) that a Clearing House will help to eliminate all or part of those obstacles. But a Latin American Clearing House means different things to different people. Those in favor do not necessarily start from common premises, nor do they come to identical conclusions. They may be at variance about the objectives of special payments arrangements. They may differ about the nature of the deficiencies attributed to the existing arrangements, and about the type of payments technique which would be adequate for the purposes that they are trying to achieve. Those who do not favor the introduction of a Clearing House arrangement may equally be inspired by a variety of arguments. They may think that existing payments arrangements in the area are adequate. Alternatively, even though they may agree that existing arrangements leave room for improvement, they may feel that a Clearing House would not be the answer, because it would not solve the existing difficulties or because it would create greater problems in other respects.

Generally speaking, those in favor of introducing a Clearing House argue that such a step will help intra-Latin American cooperation and integration, inasmuch as it is expected to remove the impediments which they believe exist in the field of banking techniques and of international payments facilities available to most Latin American countries.

As explained above, most transactions between Latin American countries, with a few exceptions, are settled in dollars through U.S. commercial banks. It is specifically this practice which the advocates of a Clearing House believe handicaps such trade.

It has already been stated that the promotion of the use of Central American currencies in transactions among the participating countries constitutes the major objective of the Central American Clearing House. Several reasons are given for preferring the use of local currencies over that of the U.S. dollar. Some hold the view that the present method is time-consuming and uneconomical; they assume that a Clearing House can improve upon the existing payments techniques. It is argued that Clearing House operations are more direct, speedier, and cheaper, and that, therefore, their introduction would stimulate trade, since the economies arising from the Clearing House technique could be passed on to exporters and importers. The Central American Clearing House is engaged in a study to determine these savings.

Those in favor of a Clearing House often base their objections to settlement through U.S. banks on the argument that it is undesirable to route intra-area transactions through third countries. They feel that the Latin American area should develop its own lines of communication, and should not be satisfied to depend on outside facilities. Once every Latin American debtor can make payments throughout the area in his own currency, the distinction between domestic and intra-Latin American transactions is bound to become less pronounced, and this will improve the psychological climate for economic integration.

Other arguments against U.S. banks as intermediaries appear to be more pragmatic. It is said that part of the dollar balances held by Latin American banks with U.S. banks are maintained for the purpose of making settlements in U.S. dollars inside the Latin American area. It is felt that such balances (whether owned by the Latin American holders or originating from credit extended by the U.S. banks) constitute a luxury which many Latin American countries can ill afford. It is argued that the introduction of a Clearing House would make it possible to reduce such dollar balances, and this is considered a major advantage. Along similar lines, it is argued that the present payments technique, by which all settlements between Latin American countries are made in hard currency, is inappropriate. U.S. dollars should be reserved in the first place for the purchase of equipment goods which will help Latin American development and which the area itself does not produce. Until Latin American production achieves a larger measure of diversification, scarce dollar resources should not be used for the commodities that presently constitute the main component of intra-Latin American trade. On the whole, those who advocate a return to some kind of soft currency approach are careful to point out that a Clearing House should operate on a multilateral basis, and that no attempts should be made to achieve bilateral equilibria.

Others in favor of the establishment of a Latin American Clearing House present arguments that go beyond the technical aspects of the Clearing House procedure, and that are almost entirely based on the assumption that a clearing arrangement should contain a significant credit element. Some feel that the transition from bilateralism to the present payments system based on the use of convertible currencies has been too rapid. They believe that the abolition of the swing credits, which have disappeared together with the bilateral agreements themselves, has brought about a situation in which some types of traditional Latin American trade are stagnating, because of a shortage of international liquidity. Far from creating new types of trade, recent payments procedures are considered to have reduced the scope of certain types of commerce that had previously assumed importance. In some cases, it is explained that lack of the flexibility previously provided by the swing margins has led to a situation in which imports and exports between two countries have declined pari passu. An example is the diminution of Brazilian lumber exports to Argentina, which has gone hand in hand with a reduction of Brazilian wheat imports from Argentina. Others merely state that the disappearance of swing credits has made it difficult to continue certain imports which, because of their seasonal nature, must be effected during a short period of the year with a consequent heavy drain on low international reserves. It is added that a Clearing House based on multilateral compensation would be an insurance against the reintroduction of some of the obvious disadvantages of bilateralism, but that, in the absence of such an institution, some Latin American countries might well relapse into bilateralism.

According to some, the establishment of a Clearing House is a prerequisite for the success of the liberalization policy now being pursued by the Latin American Free Trade Association (LAFTA) in accordance with the principles laid down in the Treaty of Montevideo. The members of LAFTA7 have, so far, engaged in two rounds of negotiations on tariff reductions and other preferences which they are prepared to grant to each other. The feeling is that these negotiations are too slow and too laborious, and that this may well continue until LAFTA starts to organize an appropriate payments system. Many of the countries concerned are struggling with balance of payments problems, and this may go a long way toward explaining the great caution that they exercise in LAFTA negotiations. Even though LAFTA hopes to achieve an increase in intra-Latin American trade, which will benefit all participants, it is feared that countries may hesitate to agree to certain liberalization measures, because they cannot afford to incur the risk of the temporary deterioration of their balance of payments that might possibly result from such a move. It is argued that such reluctance might be overcome if the existence of a Clearing House guaranteed the availability of adequate short-term financial assistance. In this context, the view is held that under existing conditions a Clearing House would be the appropriate vehicle for assuring the implementation of the principle of reciprocity, which was explained above, in Section IV.

In the same vein, some argue that the initial competitive disadvantages that must be surmounted by LAFTA trade are so great that the present preferential devices (tariff reductions, exemptions from prior deposit requirements, etc.) would probably not be sufficient. They believe that a special payments arrangement for the LAFTA area would be required as an additional protective device.

According to a slightly different opinion, even extensive liberalization of intra-Latin American trade would not, by itself, produce development and economic integration in the area. A Clearing House is considered necessary to supply the dynamic element that mere trade negotiations are not expected to provide. On the whole, great emphasis is placed on the general shortage of credit available to support intra-Latin American trade, and it is thought by many that a Clearing House might give valuable assistance in mobilizing necessary financing, while assuring at the same time that the credit would be apportioned among the participant countries in a manner which would help LAFTA to realize its objectives.

A parallel is frequently drawn between the present effort to increase trade in Latin America and similar efforts undertaken in Europe in the early 1950’s. It is pointed out that in Europe the initial attempt at trade liberalization did not start to gain momentum until it was backed by the mechanism of the European Payments Union, which performed tasks similar to the ones to be assigned to a Latin American Clearing House.

Finally, it is believed that a Latin American Clearing House would provide a useful forum, where central bankers would meet to exchange views and to learn more about each other’s problems. Reference is made to the Central American situation, where these contacts are already taking place and where they are considered to be very useful. It is also thought that a Clearing House might act as an official spokesman for the region and might take part, on behalf of the participants, in negotiations with other international institutions.

Negative arguments

Some opponents of the Clearing House concept have tended to emphasize the technical and administrative complexities to which such a scheme would give rise. They recall that bilateral payments procedures, as they had existed in the Latin American area, had required strict regulation by central banks, and they anticipate that compensations covering a wide area will re-create the bureaucratic procedures that had been discarded when bilateralism was abolished. One banker who was interviewed pointed out that several Latin American countries so far had not even organized a national check clearing, and wondered how a much more ambitious scheme covering the entire area could be administered. Others mentioned that a Clearing House system based on the use of checks, drafts, and similar negotiable instruments was likely to run into legal difficulties. They pointed out that, in some countries, the law did not clearly define the rights and obligations of the various parties involved, and that it was often difficult to obtain legal recourse if the paper remained in default. It was also frequently stressed that mail service within the area was very slow and unreliable, and that the sending of checks by a debtor to his creditor in a different country, and their return by the latter via a series of banks, were bound to be subject to considerable delay. By contrast, communications between each of the Latin American countries and the U.S. commercial centers were on the whole rather speedy and reliable.

In view of some of the misgivings indicated above, as well as others, most informants were inclined to discount the possibility that the clearing system would improve the efficiency and speed of payments. In fact, they felt that the cumbersome machinery that would have to be established, the inadequate communications, and the rather elaborate channels through which payments instruments would have to move, would make for a slower and less reliable technique than the present system. Actually, very few bankers, businessmen, and others voiced any serious criticism of the efficiency, speed, costs, and other technical aspects of the payments arrangements that are being maintained by major banks in the area. It was granted that smaller banks outside the economic centers might sometimes operate at a level of efficiency that was subject to improvement, but even with improvement it was thought that these banks would have difficulty in complying with Clearing House procedures. The commercial banks generally felt that the banking facilities presently available for intra-Latin American trade were adequate for the volume of trade now existing. In their view, trade would not be stimulated by more elaborate banking techniques but, conversely, banking facilities would naturally expand and improve as trade increased. A number of bankers interviewed saw no point in setting up correspondent relationships with banks in other Latin American countries, and incurring the costs that would be entailed, as long as the minimum volume of business that would warrant the initial expenditure was lacking. As soon as such a minimum volume of trade was achieved, correspondent relationships would be established as a matter of course and without delay. Even with such an eventual increase of direct relations among Latin American banks, many banks did not expect that the establishment of mutual accounts, through which payments could be made directly, would become a general practice. They thought that payments in U.S. dollars through U.S. banks would continue to a considerable extent, partly because local currency accounts held in Latin American banks were subject to certain risks which could be ignored in the case of U.S. bank accounts (blocking of balances, exchange rate fluctuations). Moreover, a large financial center could, in many respects, offer better and more diversified services than Latin American banks were able to extend to one another. This last-mentioned point was also adduced in response to the argument about the wastefulness of maintaining dollar balances to service intra-Latin American payments. Moreover, considerable doubt was expressed that the level of the dollar balances maintained by Latin American banks was greatly affected by the servicing of intra-Latin American payments, since the latter were of rather negligible size compared with the transactions with the United States and Europe, which were carried out through the same dollar accounts. At least one banker denied that the banks actually kept idle balances in U.S. banks. Since receipts and payments in U.S. dollars were constantly flowing in considerable volume, the banks generally had in transit a float of checks and other payment orders that was roughly equivalent to the balance maintained in their accounts. In this manner, they were able to maintain sizable dollar balances, without tying up any dollar resources of their own.

On the matter of the costs of transfers, informants were obviously not in a position to make direct comparisons between the costs involved in the present system of payments and those connected with a potential Clearing House mechanism. (Some general considerations on the question of direct and indirect costs will be explored below.)

With regard to the desirability of making payments in Latin American national currencies rather than in the major international trading currencies, aside from certain psychological factors, no practical arguments were advanced.

Some informants expressed apprehension that a clearing system not only would involve cumbersome machinery, as already mentioned, but also would lead, before long, to increased government controls over transactions. They reasoned that a system of voluntary compensation, whereby payers and payees retained discretion to decide whether or not to continue payments in U.S. dollars, would produce lopsided results as far as clearing balances were concerned. This might be tolerable if the clearing mechanism did not involve an important credit element, but it would clearly be unacceptable if clearing balances were not settled promptly and entirely in convertible currencies. Conversely, a system under which all intra-area payments must be channeled through a Clearing House could be achieved only if countries which did not now have payments controls were willing to introduce or to reintroduce them for this specific purpose. Once this happened, it was feared that payments restrictions would be only one step removed.

On the other hand, it was pointed out that, as long as some countries in the area maintained restrictions, formal or informal, on international payments, a smoothly functioning clearing system, which would give equal benefits to all participants, could hardly be envisaged. Similarly, certain observers who saw some merit, in principle, in a Clearing House doubted that an area-wide compensation could be successfully organized as long as a number of the major currencies were undergoing recurrent exchange rate fluctuations or repeated changes in their official rates. No payments scheme that included credit arrangements could be successfully applied, unless it offered protection against exchange losses and inconvertibility of balances. Under present conditions, this would impose an enormous burden on those called upon to bear the exchange risk. In their view, therefore, exchange rate stabilization was a prerequisite to any kind of monetary cooperation that the countries concerned might envisage.

Along the same lines, the complicated exchange systems still existing in a few Latin American countries, and various high charges on trade transactions, were held to be impediments to proper operation of a compensation system, or at least of one that would be fully utilized by traders. It was reported, for example, that a considerable amount of Uruguayan imports from Brazil enter in contraband trade, which is highly profitable to both parties to the transaction. The Brazilian exporter avoids aforos and export taxes and is able to convert Uruguayan pesos at the Brazilian free market rate, while the Uruguayan importer evades duties, advance import deposits, and surcharges.

Many informants pointed out that there were a number of important factors, of both a financial and a nonfinancial nature, which tended to impede the development of intra-area trade. Many of these impediments, which did not necessarily exercise an equal impact in all Latin American countries, could hardly be overcome by the establishment of a clearing arrangement. These persons recognized, for example, that certain broad considerations previously mentioned—e.g., the lack of flexibility in balances of payments owing to the disappearance of the bilateral swing margins and hesitation in trade liberalization—really related to the more general area of over-all balance of payments problems. These problems could not realistically be tackled on a regional basis, and certainly could not be overcome by a special payments mechanism. They had their root in the inadequacy of the countries’ international reserves, brought about in turn by unfavorable balance of payments developments. The difficulties for intra-area trade arising from them were the same kind as the over-all trade and payments difficulties experienced by these countries. It was feared that the creation of a Latin American soft currency area might detract from the urgency of improving the over-all balance of payments positions of the member countries, and that a Clearing House with credit facilities might act as a sedative.

Even for the intra-area difficulties themselves, it was felt that the clearing arrangement would provide only a stopgap relief. In this connection, the experience with the bilateral payments arrangements was again cited. One of the partners to these agreements often exhausted an available swing credit in a very short period. Under these conditions, the credit extension produced no more than a single shot in the arm, and as soon as its effect had spent itself, the difficulties in trade relations were the same as before. The experience after the introduction of a compensation scheme might be similar; and before long some of the countries might find themselves without further credits, but saddled with frozen clearing balances, payments delays, depreciated exchange rates for clearing currencies, etc.

Lack of credit to support intra-Latin American trade was indeed one of the most common complaints in several of the South American countries. This complaint, however, referred to trade credit rather than to balance of payments credit.

It was argued that the ability of non-Latin American exporters to offer attractive credit terms was a big competitive advantage to which even LAFTA preferences could not supply a sufficient counterweight. Latin American importers in many cases would prefer to pay a higher price to non-Latin American suppliers offering generous credit terms, rather than to select goods of Latin American origin that were somewhat cheaper but for which they had to pay cash. At the going interest rate in some Latin American countries, 12-month or 18-month credit terms at nominal cost might well compensate for a price difference of 30 per cent or more. This meant that intra-Latin American trade in many instances failed to grow, even though Latin American export commodities might be available at competitive prices, because importers continued to buy in the United States, Canada, Western Europe, and Japan, where there were credit facilities that the Latin American countries could not hope to match.

Some commentators thought that Clearing House credit could be used for commercial purposes if the central banks which received the credit should decide to pass it on to exporters. Others, however, remarked that Clearing House credit, which according to its nature was intended to bridge deficits in the regional balance of payments, could not be mobilized for commercial purposes, since no central bank would know in advance how much credit it would obtain and for what length of time. In this connection, many informants recalled that the swing credits under the bilateral arrangements had never benefited private traders.

The complaint about credit scarcity was heard much less in Mexico, where banks are able to draw on credit lines available in U.S. banks in order to stimulate Mexican export trade. From the Mexican point of view, credit facilities for export purposes appear to be limited by the risks that Mexican banks are willing to assume in respect of particular debtors or with regard to total claims on an individual country.

This factor of credit risks was frequently mentioned as a handicap to intra-area trade expansion, and one clearly not related to any payments mechanism. In this context, a number of traders and bankers pointed to the lack of adequate credit information on firms inside the area; this referred both to the credit ratings of importers and to the status of certain banks. This lack of information not only made traders hesitant to conclude export deals but also made it difficult to secure trade financing. Banks in exporting countries might be inclined to put a low ceiling on the amount of business that they were willing to handle, or they might insist on confirmation of letters of credit by a bank known to them, thereby adding to the cost of the transaction. It appeared that many banks in the area were willing to accept direct guarantees from banks in some Latin American countries, but insisted on outside confirmation in respect of banks in other countries. It was argued that conditions in this respect might be improved if, in each country, either the central bank or the commercial banks acting jointly guaranteed the foreign commitments undertaken by the local banks on behalf of domestic importers. Not all banks experienced the same difficulties. Banks with branches in several countries in the area generally thought that they were in a good position to judge the credit risks in the countries in which they operated. The comment was heard that some Latin American importers were more punctual in honoring debts to non-Latin American exporters than to suppliers within the area. It was felt that outside creditors were in a better position to protect themselves. Their claims were frequently covered by export credit insurance, and an importer who defaulted was likely to impair his credit rating in respect of all future transactions with the country concerned. A similar protection does not exist in intra-Latin American trade. One banker said that his bank exercised great caution in handling transactions with countries having complicated exchange systems. Unless the foreign party involved was well known to the bank, the latter would normally abstain, because it would be unable to check illegal practices (overinvoicing or under-invoicing, nonobservance of prescription of currency regulations, aforos, etc.) that might give rise to subsequent litigation, to vitiation of the documents that the bank was holding as guarantee, or to cancellation of the transaction itself.

It was also pointed out that payments delays, like those existing in Brazil and Chile, reduced the freedom of action of importers and technically impeded trade in seasonal products. In these cases, importers either ran a considerable exchange risk or had to try to obtain forward cover in a very imperfect forward market, where premiums tended to be prohibitive.

Some present trade difficulties were explained as being due to past complexities in Latin American exchange systems. Some of the types of traditional intra-area trade, which were now stagnating, had previously been artificially fostered by privileged conversion rates maintained under multiple rate systems. Exchange rate unification, which had since been introduced, had priced these commodities out of the market. Other factors that were limiting intraregional trade included the complexity of many formalities connected with the issuance of trade documents, deficient transportation facilities, slow handling of commodities in many Latin American ports, and freight rates which frequently made shipments from one Latin American country to another more expensive than shipments to Western European and North American destinations.

VI. Appraisal of a Clearing House Without Credit Facilities

The question whether or not a Clearing House can be expected to play a useful role in intra-Latin American trade presents two different aspects which should be analyzed separately. There are those who think that the offsetting of claims and debts through a Clearing House, rather than individual payment through the banking system, constitutes a superior procedure for making international settlements, and that the establishment of a Clearing House would be warranted, even if it achieved nothing but such compensation. There are others (and they seem to be more numerous) who think that the compensation technique as such is of only moderate or perhaps no interest, but who would welcome the establishment of a Clearing House because they expect that such an organization will help to mobilize credit facilities in support of intra-Latin American trade.

It appears that confusion is frequently caused by the fact that these two aspects are not always clearly distinguished. Of the arguments pro and con related in the preceding section, some are directed to the former, and others to the latter, aspect. If it is argued that compensation is a good thing for its own sake, its advantages over existing settlement procedures should be demonstrated. If, on the other hand, the view is held that compensation is useful as a means to an end, its direct advantages assume less importance, and it would even remain acceptable with some disadvantages, provided its indirect contribution as a vehicle of credit extension is considered to outweigh the drawbacks.

Professor Triffin, in his study presented at the CEMLA meeting, suggests that compensation as such may have some slight advantages, but that the principal attraction of the scheme would reside in its credit aspects. In his view, the step that would be least controversial would be a Clearing House for the Latin American central banks, which would perform for them functions similar to those fulfilled by each central bank for interbank clearing within the national territory. As previously indicated, he sees certain limited advantages in a minimum arrangement without credit facilities but considers that the system could make a more important contribution if it made credit facilities available to the participating countries.

The study submitted by Mr. González del Valle at the CEMLA meeting tends to put considerably more emphasis on the achievements of the compensation technique, compared with the pre-existing methods of settlement in the Central American area. Nevertheless, he states clearly that the credit element in the Central American Clearing House is small, and that, in his opinion, an increase in credit facilities would enhance the usefulness of the organization.

For an orderly discussion, it appears desirable to give separate attention to the possible advantages over existing settlement procedures of the settlement technique that might be applied by a Latin American Clearing House, and to its potential usefulness as a provider of credit.

Use of local currencies

The first alleged advantage of the compensation technique over other methods of settlement is that it would replace payment in U.S. dollars by payment in local currencies. The Central American Clearing House makes the increasing use of Central American currencies for payments among its members the measure of its success. At first sight, it appears somewhat surprising that the use of these currencies should be considered a matter of interest. The member countries of the Central American Clearing House all have currencies that are either legally or factually convertible. When both parties involved in an international settlement have convertible currencies, it would seem to be of little importance what specific currency is used in a particular transaction, as long as it is acceptable to the payee. Under conditions of convertibility, a currency of wide international circulation will normally be preferred, because it allows smooth settlement at low cost. In addition, with an important financial center as an intermediary, it is possible to use the various banking facilities and other services offered by it.

The Clearing House technique as applied in Central America does not abolish all the U.S. dollar features of present intra-area transactions. Invoicing generally continues to be in U.S. dollars. The unit of account used by the Clearing House is the dollar, even though under a different name. Balances remaining after compensation continue to be settled in U.S. currency through U.S. banks. In this manner, settlements are on a net rather than on a gross basis, but the level of a country’s dollar reserves over time is not affected. Similar procedures would probably be followed in a Latin American Clearing House.

It is alleged that this procedure has the advantage of reducing the need of the countries to maintain dollar reserves in liquid form, although of course it does not affect their net expenditure of U.S. dollars. It must be assumed, therefore, that the real benefit is a saving in interest, resulting from a reduced level of dollar cash holdings. The Central American Clearing House does not have figures on these savings. It is understood that banks in El Salvador as well as in Honduras reduced their U.S. dollar cash balances in 1962, but in El Salvador the reduction was ordered by the central bank in connection with the introduction of exchange controls, and in Honduras some banks found it necessary to replenish their liquidity in lempiras, which was running low.

Costs of transfers

A second advantage attributed to the compensation technique is its supposedly lower cost, compared with payments through U.S. banks. Charges to be borne by the importer, when instructing his bank to have U.S. dollars transferred to a U.S. account designated by his exporter, may include any or all of the following: a commission or fee due to the domestic bank issuing the instruction; depending on the nature of the instrument used for the purpose, a commission to the U.S. bank executing the payment; and the margin on his purchase of U.S. dollars against local currency. The exporter receiving the payment has to bear the margin on the conversion of U.S. dollars into his own local currency, and any cost incurred on his behalf (e.g., telegraphic transfer charges).

Direct charges

Fees, commissions, and other banking charges tend to vary from country to country, from bank to bank, and even between customers of the same bank. A study undertaken by the Central American Clearing House reportedly indicates a complex variety of rates and charges for various banking services, but González del Valle’s study contains no details on the subject. From information obtained from various banks, all located in the financial centers of the Latin American area, it appears that the commissions charged by them for ordering a U.S. dollar payment and by the U.S. bank for carrying it out are nominal, at most. It is reported that some U.S. banks charge ⅟20 of 1 per cent, with a maximum of a few dollars for making payments to another dollar account; many other transfers are made free of charge. Similar information was obtained about the commission charged by domestic banks. Several banks said that any costs arising from issuing payments instructions were covered by the margin that they earn on the exchange transaction.

Exchange spreads

The exchange rate margins in various countries are part of the cost of payments made in U.S. dollars. Practices with regard to exchange rate margins vary considerably among countries. Where appropriate, a distinction must be drawn between margins applying to foreign exchange transactions between the central bank and the commercial banks on the one hand, and between the commercial banks and the public on the other.

In some countries, all foreign exchange transactions are concluded for the account of the central bank, the commercial banks acting as its agents. Where this applies, the central bank will set the rates at which it undertakes to accept from and supply to the commercial banks foreign exchange bought or sold by the latter on its behalf—thus fixing the official exchange margins. This procedure is followed, for instance, in Honduras, where the Central Bank’s buying and selling rates for U.S. dollars are 1 per cent below and 1 per cent above the par value, respectively. The commercial banks deal with the public within the same margins. The central bank may in fact fix the margins at which the commercial banks deal with the public. These may be set at a slightly wider spread, thereby assuring the banks a remuneration for their services on a percentage basis, or at the same spread as the one maintained by the central bank, allowing the banks to make a profit only on the purchase and sales transactions that they manage to offset internally.

In other countries, the central bank stands prepared to buy from and sell to the commercial banks foreign exchange at prearranged margins, without compelling the commercial banks to act only as its agents. In that case, the banks are legally entitled to own foreign exchange and to hold long or short positions at their own risk. Under those conditions, day-to-day operations in foreign exchange tend to be concentrated in the commercial banks, while the central bank remains in the background, absorbing an influx of foreign exchange that the banks are unwilling to hold, or selling to meet a shortfall if the commercial banks are unable to supply exchange. In a foreign exchange market of this type, important customers—in contrast to small dealers—can often command fine margins, because banks compete with exchange rate margins to attract business. This is the situation in Mexico, where the commercial banks operate in foreign exchange for their own account while the Bank of Mexico is prepared to deal with them at a very narrow spread between buying and selling rates. As a result, the commercial banks in their transactions with the public generally apply a spread of only about ⅟100 of 1 per cent, i.e., they buy dollars at Mex$12.49 and sell at Mex$12.49⅛ (with important customers often commanding an even more favorable selling rate).

In other markets, foreign exchange transactions and the rates at which they are concluded are left entirely to the banks and/or exchange brokers. The central bank usually reserves the right to intervene in the market, but at its discretion. Here again, exchange rate margins for the public will result from competitive bids and offers. This is the procedure followed in Argentina and Chile. In the active and competitive exchange market of Argentina, the spreads on large transactions are reported to be as low as ⅟10 of 1 per cent. On smaller transactions, the spread may be wider, but it rarely exceeds ½ of 1 per cent. In Chile, which has a dual market with fluctuating rates, the exchange spread quoted by the commercial banks in the official market for trade transactions has generally been of the order of about ⅓ of 1 per cent. Similarly narrow exchange margins have been maintained in Uruguay. Up to May 1963, when the exchange rate was pegged at about Ur$ll per U.S. dollar by central bank intervention, commercial banks bought dollars from customers at Ur$10.98 and sold at Ur$ 11.00, i.e., with a spread of about 2/10 of 1 per cent. The exchange rate has since depreciated considerably, after a temporary withdrawal of official intervention, and the spread appears to have widened somewhat.

Finally, the monetary authorities may prescribe buying and selling rates applying to transactions between commercial banks and the public, without undertaking to sell foreign exchange to the banks. Such has been the practice in Brazil for some time. Under this arrangement, the total spread between buying and selling rates applied by the banks in transactions with customers has been about 3⅓ per cent. However, a large part of this spread has been attributable to commissions paid to exchange brokers and to stamp taxes, so that the exchange spread proper, i.e., the part retained by the banks, has been slightly more than 1 per cent.

On the whole, therefore, the spreads between buying and selling rates are not large, particularly in such countries as Argentina, Chile, Mexico, and Uruguay, where commercial banks are engaged in active competition with regard to foreign exchange transactions. Accordingly, even if a Clearing House should reduce or eliminate the buying-selling spread, the potential saving to traders would not be great. In Brazil there would seem to be more room for possible economies, but only if it were possible to reduce or abolish the brokerage commissions and stamp taxes.

However, the introduction of a clearing system would not in and of itself imply any change in exchange spreads and related practices. A reduction could be brought about by government or central bank regulation imposed upon the banks. This method was followed in Honduras, where payments in U.S. dollars continue to be subject to a 1 per cent exchange margin, while drafts in local currency for payments to member countries of the Central American Clearing House pay a commission of ½ of 1 per mil. A reduction of specific exchange margins may also be brought about by voluntary agreement among the banks. Very low commissions that do not make it possible for the banks to cover the costs of their foreign exchange transactions might well entail an increase in other bank charges or a subsidization of the operations of the Clearing House.

If the transactions passing through the clearing are made in a common currency of account (e.g., Latin American dollar or peso), a conversion into the buyer’s and seller’s currencies will still be required on both ends of the transaction. It will be recalled that Triffin proposes the creation of a special instrument, a Latin American dollar draft, to be sold by central banks and commercial banks for use in intra-Latin American settlements. He urges that the commercial banks should be held to agreed (moderate) charges and commissions on the purchase and sale of these instruments. Even so, it is difficult to see how such an instrument, involving a rather cumbersome procedure akin to a money order or cashier’s check, could be made the exclusive vehicle of settlement for regular and sizable commercial transactions. It appears to be similar to the proposed Central American check, which, however, as previously explained, is intended to serve rather marginal transactions.

In Central America, payments through the Central American Clearing House now seem to be made frequently in checks drawn in the debtor’s currency. These instruments are cleared at par, i.e., at the rates of exchange declared by each participating central bank to the Clearing House. Thus, the central banks perform certain banking operations free of charge and, in a sense, subsidize the operation of the clearing. On the other end of the transaction, however, a conversion is still necessary to give the exporter the proceeds in his own currency. In Central America, the commercial banks, covered by an exchange rate guarantee extended by the central banks, apparently effect this conversion at the official cross rate. Thus, the commercial banks forego the exchange margin while the central banks assume the hidden cost involved in securing the exchange rate. It should be noted that Central America has a tradition of exchange rate stability.

Elsewhere, it may not be easy to duplicate these arrangements. In their absence, the exchange margins applicable to the clearing payments must be presumed to be at least the same as if the settlement were made in U.S. dollars. In fact, the spreads might be larger unless, and until, the market for a clearing currency were as well established as that for the major international currencies. The question of invoicing also arises in this context. It cannot be assumed that exporters will generally change over to invoicing in the currency of the buyer; even if they should do so, the implied exchange rate could not be determined.

Where exchange rates are presently determined in a competitive market, the resulting buying-selling margins probably do not cover more than the cost of the foreign exchange operation to the commercial banks. Sometimes, the margin may even be waived if the transaction appears attractive for other reasons. The systematic reduction or removal of exchange margins in the context of a Clearing House would mean that the commercial banks would give up all or part of their profits on the exchange transactions as such. This result may be justified if the banks have, in fact, been realizing excessive profits on their exchange operations or on their over-all operations. Where this is not the case, it must be assumed that the banks would offset the loss by increasing other charges, either those related to the same transaction (e.g., letter of credit commissions) or charges on other operations. To some extent, the costs incurred by the banks in making payments may be reduced by a transfer of functions to the Clearing House. As already mentioned, part of the costs of operation of the Central American Clearing House are absorbed by the participating central banks, which make certain services available free of charge, in addition to the waiver of their own exchange differential.

Clearly, where payment delays and restrictions, or multiple exchange rates, exist, the spread between buying and selling rates as such is a minor cost element, compared with the costs related to such restrictive practices. In fact, many businessmen and officials in the area are convinced that, as long as such restrictions and differential rates or fluctuating rates exist, the institution of a clearing system would be impracticable because of the many complications arising from these practices. The introduction of compensation through a Clearing House will not by itself eliminate any complexities that now exist in a number of exchange systems in the area. Nor is there reason to assume that the establishment of a Clearing House would necessarily lead to a prompt improvement in the forward exchange market facilities.

In the industrial countries, well-organized exchange markets, providing both spot and forward facilities and permitting unlimited exchange arbitrage, have made important contributions to the smooth flow of international trade and the international exchange of services. Comparable facilities do not exist in Latin America, nor are they likely to be provided by the establishment of a Clearing House. It appears that improvement of exchange market techniques is an important prerequisite for the expansion of trade that the Latin American countries are attempting to achieve.

Transit time

In addition to the claim that a Clearing House will reduce the cost of international settlements, it is argued that it will reduce the transit time for intra-area payments. A clear picture of the speed with which payments are generally being carried out through U.S. banks is not easy to obtain. There probably are differences, depending on the place of origin and of receipt of the payment and on the transfer technique used. Most Latin American bankers agree that payments through U.S. banks are carried out smoothly and expeditiously. A Mexican banker explained that the technicalities of the settlement procedure depend on instructions given by the payee’s bank. A telegraphic transfer made by the paying bank to the credit of a New York account designated by the payee’s bank will involve immediate availability of dollars. If the receiving bank does not wish to incur the cost of the cable, the normal choice is between a check sent to it and a payment instruction in its favor mailed directly to the U.S. bank. The Mexican banker concerned prefers to receive a check drawn on a New York bank, rather than have the paying bank issue a payment instruction. If the latter procedure were followed, the Mexican bank would not be able to use the funds until it had received advice from New York that its account had been credited; this might take 4 or 5 days. Because of special mailing arrangements, however, a check dispatched from Mexico City will often be cleared in New York within 24 hours, and the dollar proceeds can be counted upon to be available in 2 days. In Tegucigalpa, on the other hand, it was learned that it usually takes 8-10 days before credit is received for checks and drafts sent to New York or New Orleans for collection.

It is even more difficult to say how much time would be consumed by a Clearing House for Latin America, since much would depend on the specific clearing technique to be applied. If the parties to a Latin American transaction remained free to make payments through or outside the Clearing House, as they saw fit, there would probably be no important change from the present situation, for whenever speedy arrival of the payment was a matter of importance, the creditor’s bank could continue to request payment by telegraphic transfer through New York. In Central America, where distances are short, payments are made largely by mail, and this does not seem to create difficulties. Application of the same method to payments throughout Latin America, however, could be quite time consuming. Mail services in the area, even between the capital cities, are frequently slow.

Under the Central American techniques for making payments through the Clearing House, as described in Section II, payments by personal check involve a series of physical movements of the instrument and a number of notices between the commercial banks involved, the central banks, and the Clearing House. Similarly, telegraphic transfers require the exchange of wire communications between the various institutions, i.e., the two commercial banks, the two central banks, and the Clearing House. This type of settlement, used for the entire Latin American area, is most unlikely to be speedier than present procedures, and it might well be considerably slower.

Other aspects

Several aspects of intra-Latin American transactions will not be affected by the establishment of a Clearing House. The Clearing House will not take cognizance of any payments commitment until the private creditor’s claim on the private debtor reaches the stage of settlement. At that point, the Clearing House substitutes a new obligation for the old one: it replaces the latter by a claim of the Clearing House itself on the central bank of the original debtor, and a debt which it owes to the central bank of the original creditor. The Clearing House, therefore, is not involved in anything that precedes the final payment. It has nothing to do with the arrangement of the underlying contract, the opening of letters of credit, the handling of collections, etc. It does not contribute to the solution of any difficulties (such as lack of credit facilities) that may arise in that context, and it offers no substitute for any services that may be rendered by commercial banks, acting as intermediaries in intra-Latin American business, before the point of settlement is reached.

Conversely, it is conceivable that the Clearing House may reduce the usefulness of commercial banks as go-betweens; this would depend on the rules that attend its operations, notably the strictness of any prescription-of-currency regulations to which its operations may be subject. A requirement that all intra-Latin American payments shall be channeled through the Clearing House may adversely affect the availability of dollar financing for such transactions. It may, furthermore, interfere with the present practice of having U.S. banks open letters of credit or confirm letters of credit opened by banks in a Latin American importing country, and this may make it more difficult for importers and exporters to come to terms. Also, domestic banks not specializing in foreign payments relations may be less effective in checking the documents sent to them against the conditions of the transaction spelled out in the letter of credit. Some informants believe that it would take a long time for these banks to acquire the experience and personnel training needed for the adequate performance of these highly technical assignments. When considering the question of whether or not settlement of intra-Latin American payments through a Clearing House should be made obligatory, governments will need to weigh the advantages of rechanneling all payments inside the area against the possible damage that may be caused by the elimination of certain established banking relations.

It follows from the foregoing that it is difficult to foresee any major achievements of a Latin American Clearing House if its primary or sole purpose is to improve technical payments procedures in the area. The Central American Clearing House, within its own orbit, appears to be functioning smoothly, but some of its features would not be applicable to the larger group, and the experience derived from its operational technique would be of only limited value to a possible Latin American Clearing House.

In brief, while Latin America faces many problems in the payments field, it appears that few, if any, of these problems, and certainly not the more important ones, are susceptible of a solution through a system of payments compensation. The advantage to be gained from any possible economy in the use of dollar balances, if indeed such economy should result, seems unlikely to be appreciable. It appears at least doubtful that settlement through a Clearing House would be less costly and more expeditious than settlement through present channels, and some evidence points to the contrary. There are, moreover, certain possible drawbacks in a Clearing House, such as a loosening of relations with international banking institutions, whose services would continue to be required for transactions with countries outside the area, for the provision of trade financing, etc. It is also probable that a Clearing House would require considerable administrative regulation and supervision. Certain countries in the area would have difficulty in accepting some of the requirements that the normal functioning of a Clearing House seems to postulate. Some of the indirect advantages which the Central American Clearing House seems to have achieved, such as the establishment of closer contacts among central bank officials and the unification of payments instruments, are not connected with the clearing technique as such, and could be realized independently.

VII. Appraisal of a Clearing House with Credit Facilities

Technical differences between a Clearing House with and without credit

As previously explained, there is a considerable difference between one type of Clearing House, designed primarily to provide improved payments techniques, and another type, organized for the purpose of mobilizing credit facilities. Under present conditions, it is unlikely that establishment in Latin America of the former type (described and analyzed in the preceding section) would widely be considered a worthwhile achievement. González del Valle favors the injection of more credit into the Central American system. Triffin discusses the possibility of creating a Clearing House with minimal credit facilities, but only as a tactical step toward the realization of a more ambitious institution. In the plans advanced by ECLA for intraregional financial cooperation, credit plays a major role. Officials and businessmen who showed themselves to be in favor of a Clearing House arrangement seldom spoke of an institution that would not provide credit facilities.

A Clearing House containing an important credit element would have to be judged by criteria that are in many respects different from those mentioned in the preceding section. For one thing, the advantages or disadvantages of the compensation technique, compared with the present methods of making payments inside the area, would no longer need to be decisive, since the principal attraction of the scheme would be the credit rather than the compensation itself. Furthermore, the availability of credit would affect some of the technical aspects of the operating procedures of the Clearing House. Finally, the terms and conditions attending the availability, and the use and the repayment of potential credits, would have to be analyzed in detail. In all these respects, the experience gained with the Central American Clearing House offers few, if any, answers to the problems that would have to be solved for a Clearing House covering all or most of Latin America. The credit element in the Central American Clearing House is quite small, and most of the credit extended is available only for short periods (generally one week). The following analysis is based on the assumption of a Latin American Clearing House offering relatively larger credit facilities than those offered by the Central American Clearing House and making the credit available for longer periods.

The technical differences between a Clearing House without (or with very small) credit facilities and one in which the credit element plays a significant role will be examined first. The procedure of channeling payments through the Clearing House, and of offsetting claims and debts to the extent that they cancel each other, need not be different from the one outlined previously. In the preceding section, however, it was assumed that net balances remaining after compensation would be immediately settled in U.S. dollars (or, as in the Central American Clearing House, with little delay). This aspect now changes. As soon as the credit element comes into play, any net debt owed by a participating central bank, after compensation has been effected, will be consolidated. This is likely to affect the technical rules of the Clearing House in at least three ways. It would have an impact on prescrip-tion-of-currency regulations, on safeguards in the event of liquidation of the Clearing House, and on the rules to be applied should a participating central bank default.

In the preceding section, it was suggested that participating countries could either prescribe settlement through the Clearing House on a mandatory basis or offer settlement through the Clearing House as a facility, allowing it to compete with other payments techniques that would remain available. The latter procedure is now followed in Honduras.

When a substantial amount of credit is involved, however, the countries’ freedom of action in regard to these choices is likely to be narrowed. If some countries prescribe that payments to all countries participating in the scheme shall be made through the Clearing House, whereas others do not, the countries with prescription regulations will pay their debts through the clearing and will receive some of their claims outside the clearing (i.e., in U.S. dollars). Conversely, in some cases the countries without prescription regulations will pay dollars where they might have incurred a debt to the Clearing House. This will distort the net clearing balances remaining after compensation. As a consequence, the countries that do not prescribe settlement through the clearing will register in the books of the Clearing House a smaller over-all debit balance or a larger over-all credit balance than would otherwise have arisen. In this manner, they will receive less credit from the Clearing House, or they may be required to make more credit available to it. There are probably few countries in the area that would be unconcerned about this difference. It follows that a Clearing House with substantial credit facilities would almost inevitably require participating countries to introduce prescription-of-currency regulations, making it obligatory for their residents to channel all intra-area payments through the clearing mechanism. When this happens, any possibility of testing the efficiency of the Clearing House will be lost, since its services must be used regardless of whether they are cheaper and speedier than the traditional channels.

The introduction of prescription regulations would have other consequences. In the preceding section, it was stated that any enforced elimination of existing payments channels was bound to impair commercial banking relations. Furthermore, some Latin American countries do not presently have exchange control regulations, and would have to introduce or to reintroduce them for the purpose. Such controls, in order to be effective, would probably have to extend to all outgoing payments, and would, therefore, require the setting up of considerable administrative supervision. The creation of a fairly elaborate exchange control apparatus would in itself be costly and would undoubtedly produce delays. It would, moreover, open the way for the subsequent introduction of restrictive practices.

A related point is whether all countries would be willing to accept payment through a Clearing House for all their exports. This question is probably of no significance when lending commitments are small, but it may assume importance if acceptance of payment through the clearing involves the obligation to extend substantial amounts of credit. In this connection, it is of interest that several commodities (especially certain minerals) used to be sold on a dollar basis, even during the period when most payments for trade in Latin America passed through bilateral agreement accounts.

Furthermore, the presence of substantial credit facilities would have an important bearing on the need for a Guarantee Fund and on the rules applying to the liquidation of the Clearing House. Here again, the experience of the Central American Clearing House is of little assistance. That institution has a Guarantee Fund to which every member has contributed US$75,000, which is too small to cope with anything but a minor emergency, and which so far has consistently been bypassed. Furthermore, the Central American Clearing House Agreement contains no more than very cursory regulations applying to its liquidation, the conditions of which will have to be decided at the appropriate time ad hoc. Since the Central American Clearing House is not likely to hold considerable balances at any time, neither the smallness of the Guarantee Fund nor the absence of substantive provisions applicable to its liquidation is considered to be a serious shortcoming.

The size of a Guarantee Fund and the conditions of liquidation would, however, be much more important with reference to a Clearing House that did involve extensive credit facilities. As previously stated, a Clearing House substitutes new obligations for those that existed between the private debtor and his private creditor. In doing so, it assumes independent commitments vis-à-vis the central banks that hold net creditor positions in its books. The Clearing House, although primarily an administrative institution, thus acquires assets and liabilities of its own. It must be assumed that those holding claims on the Clearing House would wish to have their claims backed not merely by the claims that the Clearing House itself holds on the debtor countries, but by more substantive guarantees. These would probably have to be derived from a fund set up for the purpose. The size of the Guarantee Fund, to be provided by the members collectively or from outside sources, would therefore have to be adequate to establish the creditworthiness of the Clearing House itself. The conditions under which it could be used and according to which it would have to be replenished would have to be worked out in advance.

Similarly, in regard to liquidation, prior agreement would have to be reached about the manner in which the claims and debts of the Clearing House, outstanding at that time, would be reconstituted in the form of bilateral claims held by some central banks in the area on others, and about the conditions pertaining to the reimbursement of such claims. A situation might occur, unless rules had been adopted obviating this possibility, in which one central bank would find itself holding a claim on another central bank well in excess of any amount that it would have been willing to make available to that bank on a bilateral basis. When potentially large balances are involved, agreement about these legal aspects cannot be deferred until the contingency of liquidation arises.

The need for setting up a Guarantee Fund of adequate size, which would have to be maintained intact for emergency purposes or in order to be available in the event of liquidation, would pro tanto reduce, and possibly cancel, the advantages to be derived from any possible reduction of dollar balances now held for the financing of intra-area trade. Triffin’s proposal, in fact, provides for a substantial reserve to be held by the Clearing House in gold or convertible exchange, as security against its obligations.

Finally, the association of the clearing technique with the extension of credit would give increased importance to the exchange guarantee that any Clearing House would require. Inasmuch as all balances would be expressed in a unit of account, changes in the value of any member currency would not affect the claims or debts of the Clearing House. Each central bank in a net debtor position would have to bear the full risk of any depreciation of its currency during the period for which it has received credit, and in the event would incur a local currency loss.

Technical aspects of Clearing House credit

The various aspects of credit extension by or through a Clearing House include (1) the purpose for which credit will be required, (2) the size of the credit, (3) the time for which it will be made available, (4) its source, (5) the criteria for allotment among member countries, (6) conditions attached to its use, and (7) methods of repayment.

Purpose

The consensus among advocates of a Latin American Clearing House seems to be that additional credit is needed for purposes connected with the realization of the objectives of LAFTA, including the increase of intra-Latin American trade, and with the stimulation of Latin American development and integration. As previously stated, complaints about the lack of credit facilities in Latin America are widespread, and they refer to many types of credit. By its nature, credit made available through a Clearing House would provide balance of payments support to recipient countries and thus enable debtor countries in the area to accept commitments in the field of trade liberalization which, because of the level of their currency reserves, they would otherwise have to avoid. The view that this type of credit would play a useful role is based on the opinion that at least part of the difficulties experienced in LAFTA negotiations so far have arisen from balance of payments considerations.

According to some, the main obstacle that has prevented governments from being more forthcoming in liberalizing intra-Latin American trade is the feeling of uncertainty about the immediate results of such action, coupled with the fact that they do not have adequate exchange holdings to meet any contingency that may arise. It is argued that the certainty that credit facilities were available when needed would give confidence, and would thus remove inhibitions that governments have shown in the past.

According to others, the role of Clearing House credit would have to be more specific than the one described above. Reference is made to the principle of reciprocity (described in Section IV). To a country developing a debit position in LAFTA, credit would have to be extended in order to tide it over the period of adjustment during which the other members of the group would prepare and implement measures to rectify the debtor’s position. But some argue that the purpose of the Clearing House credit would be to allow a debtor country time to take remedial action to remove the cause of its deficit, and to create a surplus necessary for the repayment of the credit extended to it.

As indicated above, any credit flowing from a clearing arrangement would essentially amount to balance of payments credit to certain participating countries. It does not always appear to be recognized that this kind of credit would not be of direct benefit to private traders. Thus it would not meet one of the complaints most frequently voiced, namely, that lack of commercial credit constitutes an important impediment to the growth of intra-Latin American trade. An export that would not materialize because the importer insisted on credit facilities which the exporter was unable to provide would not be rendered feasible by the fact that a Clearing House stood ready to extend credit to the central bank of a country with a regional deficit. By its nature, a Clearing House does not operate until the underlying transactions have been completed and reached the stage of cash payment.

It has nevertheless been suggested that Clearing House credit could be made to play a dual role, if central banks allowed importers to share the credit facilities that the Clearing House made available to them. It is difficult, however, to visualize how a central bank could thus commercialize its clearing credit. No facilities could be made available to importers in regional surplus countries, because the central bank itself would not receive any credit. Even in deficit countries, the central bank would not know in advance the amount of credit it was to receive; and, at best, it could finance only a part of the country’s imports from the area. The problem of allocation of credit would thus be quite intractable. No example has been found in which a swing credit under a bilateral payments agreement has been channeled to benefit private traders. The only possible exception is a government import which would not be carried out on a cash basis because of the low level of international reserves, but which might be consummated if the government knew that the central bank would finance it with clearing credit. In all other cases, commercial credit and balance of payments credit should be considered as two separate matters, serving different purposes.

Size

Little thought has been given so far to the amount of credit that would be required to perform the functions for which it is being sought. The size of the credit would obviously be related to the magnitude of the deficits which it was supposed to cover and to the length of time during which it was intended to be used, but probably it could not be fixed in advance with precision. Without attempting to be specific, the ECLA Secretariat has stated repeatedly that the credit should be ample. For practical purposes, i.e., if negotiations about the establishment of a Clearing House were to go forward, the countries involved would probably have to ask themselves how far the amount of credit that could be mobilized would go toward realization of the objectives of the Clearing House. In this context, it may be recalled that Triffin discusses a scheme that might start out without any credit, and to which various types of credit might be added subsequently. It is obvious, therefore, that the scope of a Clearing House may be tailored, within certain limits, to the amount of credit that it manages to obtain.

For theoretical purposes, however, the question may well be reversed, and the order of magnitude of the credit required may be discussed without immediate reference to the chances of obtaining it. Triffin briefly touches upon the size of the credit that, in his view, would be adequate to support a Latin American Clearing House, and says that the amount is rather smaller than one might think at first sight. According to him, the European Payments Union (EPU) functioned very successfully for eight years with total resources of approximately US$1.5-2.0 billion, which were obtained from a working capital furnished in gold and convertible currencies of no more than $272 million, and credits from countries with surpluses which generally did not exceed a total of $1.5 billion. On the basis of these resources, the EPU was able, throughout the period of its existence, to maintain liquid reserves in gold and convertible currencies which rarely fell below $400 million, inasmuch as its total outstanding loans to debtor countries seldom rose beyond $1 billion. In this manner, according to Triffin, the EPU financed a turnover of transactions many times larger than that of LAFTA. For instance, total exports from Western Europe in 1953 were nearly 4 times as large as total exports from Latin America, and in 1960 more than 6 times as large. As for intra-European trade, it was 20 times as large as intra-Latin American trade in 1953 and more than 40 times as large in 1960. On this basis, Triffin thinks that total working resources of $100-300 million would be more than ample to initiate a Latin American Payments Union system. On top of this, according to his criteria, resources available for short-term (interim) financing might initially absorb about $160 million.

Calculations along these lines are subject to a number of qualifications. The credit needs of a Clearing House cannot be inferred from past flows of trade in an area, but should rather be based on the development of trade expected in the future. Also, a direct comparison between the credit facilities of the EPU and the credit needs of a possible Latin American Clearing House is likely to be confusing, because EPU credit was never available to cover more than part of a member country’s deficit. During the first four years of its existence, the EPU covered by credit, on the average, 60 per cent of the deficit accumulating up to the limit of a country’s quota, while the deficit country had to pay the remainder in gold or dollars. The credit part was reduced to 50 per cent by the middle of 1954, and to 25 per cent in the summer of 1955, with corresponding increases in concomitant gold or dollar payments.

An important aspect affecting the size of the credit is the question of what happens after a debtor country exhausts the credit facilities that the Clearing House makes available to it. The most obvious answer is that any further deficits then arising in the clearing would have to be paid forthwith in U.S. dollars. It should be pointed out, however, that most bilateral payments agreements existing in the area did not provide for so sharp a cutoff. Under these agreements, the credit ceilings usually represented “talking points,” When these were reached, negotiations between the partners concerned were supposed to be initiated, without necessarily interrupting the flow of trade and the credit connected with it. The amount of credit available under a bilateral payments agreement thus usually proved to be flexible; in fact, the claim held by one partner on the other frequently exceeded the amount originally stipulated.

It is doubtful whether similar flexibility could be established under a Clearing House. An institution assuring cooperation among several countries, and assuming direct obligations to its members, would probably require precise rules. In addition, the negotiating position of a debtor country vis-à-vis the rest of the group might be weaker than vis-à-vis a single bilateral partner. It must be assumed that the amount of Clearing House credit available to each country at any point of time would be clearly circumscribed, and that once that credit had been exhausted the deficit country would revert to hard currency for making further payments.

Period

Like the size of the credit, the period for which it should be made available has not been subject to extensive study. It is conceivable that a Clearing House may provide different types of credit, available for different periods of time. Here again, Triffin’s paper offers some suggestions. In his view, so-called interim financing should first be arranged, making it possible to postpone to the end of the month the payments resulting from the daily net balances in each country’s general account with the Clearing House, except when the cumulative debt during the month exceeds the credit line granted to the debtor country concerned. At the end of the month, a second credit facility would become available, allowing the debtor to repay his balance accumulated during the month in not more than 12 monthly installments. This facility, according to Triffin’s suggestions, would be extended to countries that have deposited gold and foreign exchange with the Clearing House, and would not exceed the amount of such a deposit. The principal aim of the second postponement would be to give time for the negotiation of medium-term credits, in support of a general stabilization program to be undertaken by the debtor country.

Of the three different types of credit suggested by Triffin, the first, which allows the postponement to the end of each month of settlement of clearing balances, appears to be a matter of convenience, which is more or less inherent in the clearing technique. The period of postponement might well be shorter, as is borne out by the practice followed in the Central American Clearing House. Although such a postponement affords a measure of relief to the debtors (and a corresponding burden on the creditors), it is unlikely to induce any major changes in liberalization policy.

The second type of credit, which would have an average duration of 6 months, would not afford any additional reprieve to the debtor, since it is intended to be available only to the extent that the debtor has previously deposited gold or foreign exchange with the Clearing House. In fact, the debtor who uses this type of credit uses his own resources.

It follows that in Triffin’s concept the most important type of credit would be the medium-term credit negotiated ad hoc.

Under other proposals, mutual credit may be extended for indefinite periods, if debtors are permitted to retain any credit received by them for as long as their deficits persist.

Little or no reference has been found to the length of time during which the members of a Clearing House might want to maintain their special relationship, including the credit arrangements forming part of it. The EPU was not concluded for a predetermined period, but its preamble emphasized its transitory character. There are no indications whether a Latin American Clearing House with credit features would be intended to be a permanent institution, or whether it should contribute to its own ultimate liquidation.

Source

There are essentially two sources from which Clearing House credit might be derived. One is inside credit, made available by the members of the group themselves; the other is credit obtained from outside the group.

Inside credit may be subdivided into two different types. One possibility is that some or all members of the group would set aside a certain amount of their foreign currency reserves (normally in the form of a special fund), from which qualified group members could receive credit. Another possibility is that the members of the group might reach agreement about credit lines, representing the maximum amounts of credit that they would stand ready to extend to, and be entitled to receive from, the group, without determining in advance who would be the grantors and who the recipients of credit. The latter type of arrangement is described as mutual or reciprocal credit. The ECLA suggestions appear to be based entirely on the use of mutual credit. Other proposals, including Triffin’s, seek a combination of inside credit, both mutual and nonmutual, and of outside credit.

It should, of course, be realized that under a system of inside credit the assistance received by some members of the group would be derived from resources made available by other members, and that the group as a whole would not thereby be financially aided. Within prearranged limits and for agreed periods, some member countries would have to extend credit so that other members might receive it. Of course, none of the Latin American countries has a regular surplus of capital over and above its own requirements that would be available for export. From a balance of payments point of view, inside credit arrangements would bring about a redistribution of dollar resources among the participating countries, increasing the dollar reserves of the credit recipients and reducing those of the credit grantors. Accordingly, it would not directly alleviate the balance of payments problems of the area as a whole.

Whereas outside credit and nonmutual inside credit could conceivably be arranged apart from a Clearing House arrangement, mutual credit for multilateral use would have to be channeled through a Clearing House. Member countries would have to agree about a credit line to be granted by each of them to the Clearing House, as well as about credit lines (possibly but not necessarily for the same amounts) to be granted by the Clearing House to them. The outcome of the clearing process would then determine what countries would be extending mutual credit and what countries would be receiving it. Compensations would take place periodically, and the balances resulting from each subsequent compensation would be added to each member’s debit and credit position that had been previously established. This is essentially the procedure that was followed by the EPU.

There is a possible complication that might affect the use of mutual credit. At some stage (depending on the rules to be agreed upon), creditor countries would become entitled to receive full or partial payment in convertible currencies, and, conversely, debtor countries would become obliged to make such payments. If the credit commitments accepted by creditors and the credit grants extended to debtors had been fixed independently, there would be no certainty that dollar payments would be due from debtors at the same time and in the same amount as creditors’ rights to receive payment. Conceivably, there might be several debtor countries, all operating within the limits of the credit lines available to each of them, and only a small number of creditors. The concentration of claims in the hands of the latter might produce a situation in which some lending commitments became exhausted before the borrowing facilities were. Since the Clearing House, in accordance with the principle of debt multilateralization, would assume a debtor position vis-à-vis the creditor countries and a creditor position vis-à-vis the debtors, it might find itself in a position in which it had to make dollar payments to the former without receiving at the same time dollar payments from the latter.8 In order to honor its obligations, the Clearing House would thus have to be equipped with a liquidity fund guaranteeing the fulfillment of its dollar obligations. The need for a separate liquidity fund could be obviated only if the rules fixed either the lending commitments or the borrowing facilities, but not both. This is the procedure followed by the Central American Clearing House. As explained in Section II, that Clearing House fixes the maximum lending commitments of its members, while the debtors as a group have to share the total credit that happens to be available at any particular time.

Different considerations apply to a Clearing House making use of outside credit. In that case, the member countries which accumulate regional deficits would continue to enjoy borrowing facilities, but the lending commitments would be accepted by credit givers outside the area, and the surplus countries in the area would receive payment for their intra-area claims in convertible currency, made available by the outside lenders.

At least a moderate amount of mutual credit appears to be indispensable to the operation of a Clearing House, since compensations and concomitant settlements are unlikely to be carried out instantaneously. Whenever a minimum period is allowed before deficit countries are called upon to make settlement, the surplus countries will have to extend credit. This type of short-term credit, accruing between two settlements and made available on a mutual basis, is referred to as interim credit. In the Central American Clearing House, interim credit is the only credit provided. Although, under its rules, a creditor may require settlement as soon as his credit balance exceeds the amount of his local currency subscription, settlements are in practice carried out at weekly intervals.

According to Triffin’s proposals, interim credit would constitute the first phase of a possibly more extensive credit arrangement. Although creditor countries would probably be assured of prompt payment in convertible currencies at the time of settlement, deficit countries could invoke further borrowing facilities. As previously explained, Triffin suggests the setting up of a fund, fed by members’ contributions in foreign exchange, from which each deficit country could borrow up to the amount of its participation. The use of outside credit would come into play only in a third phase. Triffin does not offer any detailed suggestions about the conditions under which such credits might be acquired.

Of the practical chances of obtaining Clearing House credit from outside sources, little can be said. Any attempt to that effect would require negotiations with potential lenders, based on a detailed blueprint of the Clearing House. This, in turn, could not be undertaken until Latin American countries willing to participate had reached a considerable measure of understanding among themselves with regard to the future operation of the Clearing House. Triffin suggests that a fund available for medium-term borrowing might be formed partly with resources from the Alliance for Progress, or that the need for it might be obviated by close cooperation between the International Monetary Fund and the Clearing House.

Criteria of allotment

Under the ECLA proposals, the criteria according to which a Clearing House would allot credit to its members would be closely geared to the incidence of intraregional imbalances. In ECLA’s view, the raison d’être of the compensation procedure is that it provides the technical test to determine who qualifies for credit and for what amount. The question whether or not this is an acceptable criterion has been extensively debated, but the gap between those in favor and those against does not appear to have appreciably narrowed. On the one side, the argument is that the participating countries are making a special effort to develop intraregional trade, as a starting point for regional development and integration. It is felt that this effort merits specific support to overcome the many difficulties with which it is faced, and that its success may well hinge on the availability of credit for the purpose of financing deficits to which these steps may give rise.

Others argue that the size of a regional deficit has no relevance, whether or not the region has embarked on a policy of cooperation and integration. They see no a priori reason why intraregional trade should be balanced. They do not believe that a position of intraregional equilibrium should be considered of special merit, or that the size of each country’s regional imbalance should be a true indicator of its credit needs.

The practical significance of the controversy appears to center on the criteria according to which an outside capital contribution (on the assumption that such a contribution is available) should be apportioned among the members of the group. If the regional deficit is accepted as the yardstick, it follows that the regional surplus countries will receive no share of the contribution.

In Triffin’s outline, only the interim financing is related to the incidence of regional imbalances. After the settlement date, a debtor country is permitted to borrow up to the amount of its own contribution to the working fund of the Clearing House. The main credit element which is brought into play in the third stage is intended to be made available on a discretionary basis. The debtor country, according to this proposal, must negotiate about a general stabilization program, designed to maintain the exchange rate and convertibility and, if possible, balance of payments equilibrium with the world as a whole, instead of just within the area. The purpose of these credits is not closely related to intra-area objectives; conceivably, such credits could be arranged separately from the Clearing House technique. Triffin explicitly states that no country should be obliged to bring its regional balance of trade into equilibrium.

Conditions for access to Clearing House credit

Several possible conditions under which debtor countries would be given access to the resources of the Clearing House may be distinguished. One is that access, within the limits of the credit line available to each participant, would be full and automatic, predicated on the existence of a deficit. Automatic access would inevitably apply to interim financing, but this facility, as already stated, would be unlikely to have an important impact on the recipient country’s commercial policy. To induce countries to liberalize trade as rapidly as feasible, it is frequently argued that not only interim credit but all Clearing House credit should be made available on an automatic basis. One of the main alleged purposes of a Clearing House is to inspire confidence by giving participating countries the assurance that any risks incurred in the process of trade liberalization would be covered by credit facilities. This purpose would fail to be achieved if countries were uncertain about their access to Clearing House credit, once the need for such credit had been demonstrated.

Another view is that the procedure which assures automatic access to credit facilities has been extensively tried under the system of bilateral payments agreements—on the whole, with little success. It is pointed out that fully automatic credit may be absorbed without remedying the underlying conditions that created the need for it. Under bilateral swing credits, to which access was equally automatic, available facilities have often been rapidly exhausted; in that event, after a brief spell, trade experienced the same difficulties as before. Instead of imposing on the recipient country the need to improve its balance of payments position, the principal effect of automatic credits may well be the opposite. The availability of this facility may induce a country to tolerate the continued existence of an imbalance, lest the available credit facilities go unused. In this context, the relation between internal monetary policies and a balance of payments deficit must be given considerable weight.

A second possibility is that Clearing House credit would be made available to any deficit country that satisfied certain conditions agreed upon in advance. Under the EPU, credit facilities could be automatically invoked provided the debtor country made concomitant gold or dollar payments in accordance with a predetermined schedule. The purpose of this rule was to make credit facilities available when the need was genuine, but at the same time to create a disincentive against imprudent use.

Finally, all or some Clearing House credit after the settlement stage might be made available on a discretionary basis. This implies that both the size of the credit and the conditions pertaining to it would be subject to negotiation, in accordance with the merits of the individual case. If it is assumed that the right to make discretionary decisions should be exercised by the Clearing House, i.e., by the group of cooperating countries themselves, rather detailed agreement about the purposes that the Clearing House is attempting to achieve would probably have to be reached, in order to show member countries what they may reasonably expect, and to explain to potential lenders the use to which their money will be put.

Methods of repayment

Repayment of Clearing House credit might be arranged in two different ways. According to one, the debtor countries would undertake to repay in accordance with a prearranged time schedule, be it in installments or in toto. According to the other, a debtor country’s effective use of the credit facilities of the Clearing House, within the limits of its credit line, would at all times be determined by its cumulative deficit. Where the latter procedure was followed, an outstanding debt would be reduced if and when a country with a cumulative deficit registered a clearing surplus at some settlement, and the debt would be fully discharged when, in the course of successive settlements, a preexisting deficit position had been reduced to zero. There would then be no repayment schedule. This technique, which also applied to the use of swing credits under bilateral payments arrangements, is described as compensation over time. It implies that, as long as a debtor country stays within the limits of its credit line, it will not be called upon to make repayments in convertible currency.

Triffin advocates repayment of Clearing House credit in accordance with fixed schedules. Interim credit would have to be repaid at settlement. At that time, debtors would have an option to refinance, and the new credit would have to be repaid in not more than 12 monthly installments. He makes no detailed suggestions about the repayment commitments attached to discretionary credits, but since the latter are intended to be geared to agreed economic programs, it is clear that a debtor would have to know in advance when his repayments would be due. In these and similar cases, the deficit country would have to see to it that it had available or that it accumulated in good time the currency reserves required to make its contractual repayments, whether or not such reserves could be earned in intraregional trade. Also, a repayment schedule attached to a Clearing House credit would tend to underscore the debtor country’s responsibility for meeting the repayments. Although the existence of a repayment schedule need not preclude action by the surplus countries tending to alleviate the debtor country’s position, the latter would have to take its own policy measures so as to assure that it would not default on servicing its debts.

The first-mentioned repayment technique, by which credits remain outstanding as long as a country continues to have a cumulative deficit position, appears to follow logically from the principle of reciprocity. In accordance with that approach, surplus countries are expected to correct the deficit position of the debtor countries by granting them additional trade facilities. This system puts the burden of maintaining the revolving nature of the Clearing House resources on the surplus members, and exerts no pressure on the debtors, whose continued recourse to Clearing House credit would by implication be ascribed to lack of adequate liberalization by the surplus countries. As previously stated, this approach is based on the view that regional balances are reversible, and that their elimination is desirable. Difficulties may be expected to arise when a deficit country approaches or reaches the ceiling of its Clearing House credit, since the underlying philosophy implies that the need to make settlements in convertible currency after an available credit line has been exhausted will impede progress toward regional integration. Under the Treaty of Montevideo, a debtor in the above position might invoke the escape clauses (Articles 23 through 26) which permit, under certain conditions, the temporary withdrawal of trade concessions previously extended by it. In order to avoid such retrogressive action, the general aim to be achieved under this system would be the establishment and maintenance of regional balance, with a tolerance determined by the unused borrowing facilities available to each country in the clearing.

Clearing House based on mutual credit

The foregoing analysis of the various credit aspects that may be involved in a Latin American Clearing House has shown that conceptually there are two types of credit-dispensing institutions that might engage in arranging compensations in respect of intra-Latin American payments. The critical difference appears to be the source from which credit may be derived, i.e., whether it is made available purely on a reciprocal basis or obtained from outside. The main differences in operating technique and probable economic impact stem from this distinction.

The following discussion will not dwell on the relative advantages and disadvantages, in terms of broad monetary philosophy, of the two types of Clearing House. The conflicting views on this subject appear to have been sharply drawn, and previous debates on the subject have failed to narrow the gap between them. Instead of discussing broad principles, which are unlikely to be easily reconciled, it may be more appropriate to investigate how much common ground can be found. Such investigation should start from the premise that Latin American countries are interested in establishing closer economic cooperation and in developing intraregional trade policies, and that these objectives will be faced by many and varied obstacles. An attempt will then be made to appraise the merits of different Clearing House arrangements on two main grounds, i.e., what prior problems must be solved before the accomplishment of a Clearing House agreement becomes reasonably feasible, and—on the assumption that a Clearing House can be negotiated—what benefits are likely to be derived from it.

With regard to the practical chances of establishing a Clearing House operating with reciprocal credit, the first point is to determine which Latin American countries would be able and willing to assume the role of creditors in a mutual credit scheme, and to assess how much credit they would be willing to extend and for what length of time. The next question is whether the amounts potentially available would induce the possible debtor countries to liberalize intra-area trade more freely than they have been doing so far, or would be likely to do in the absence of such an arrangement.

Potential creditors will probably want to limit their credit commitments, whereas potential debtors presumably will want to fix available credit lines at a high level. Advocates of the mutual credit system have frequently argued that credit facilities, in order to fulfill their purpose, should be ample. One of the considerations prompting interested creditor countries to offer credits of a certain size may be the desire to protect their export interests. In this context, it should be noted that the principle of nondiscriminatory treatment of all intra-area trade has been unconditionally incorporated in the Treaty of Montevideo, without reference to the conclusion of a payments arrangement. As a consequence, the incentive for potential creditors to participate in a payments arrangement may be rather small.

If there proves to be a gap between the maximum credit offered and the minimum requested, the question of whether the divergence is such as to render the scheme infeasible, or whether further negotiations could bring the two groups within hailing distance, should be investigated. A fact of importance is that deficit and surplus positions may shift over time. Countries which initially are interested in big credits, because they think that they will be at the receiving end, may find later that they have to make sizable credits available.

The proposals for the establishment of a Clearing House operating with mutual credit are based on the desire to speed up, and to give more scope to, the development of a Latin American common market. It is not clear whether a Clearing House is considered necessary because of fear that, without it, the time schedule agreed in the Treaty of Montevideo may not be adhered to, or because that time schedule should be accelerated. In any event, it is expected that a Clearing House will improve intra-area trade liberalization, and that the essential role of Clearing House credit will be to cushion the unpredictable effects of such liberalization.

At the same time, however, it will be necessary to keep the credit revolving, in order to prevent a slowdown or even collapse in common market trade when lines of credit are exhausted. The question then is whether the creditors are willing to rely on reimbursement brought about by a reversal of debtor countries’ clearing positions and, since this reversal is not likely to take place spontaneously, to undertake the measures that will enable the debtors to increase their exports to the area.

As pointed out earlier, some of the advocates of a Clearing House based on mutual credit believe that the responsibility for keeping the credit lines open should be placed on the surplus countries. It is doubtful that this obligation can be directly inferred from Article 11 of the Treaty of Montevideo. In the course of the Montevideo Conference, the principle of reciprocity (initially defined as “equivalence of the flows of trade produced by the concessions”) was extensively debated, and the agreed text represents a compromise.9 These discussions, therefore, would probably have to be reopened if a Clearing House operating with mutual credit should be proposed.

A surplus country might very well find difficulty in providing further trade facilities (in addition to what is supposedly an accelerated liberalization schedule) without creating internal problems of an economic or a political nature. Furthermore, that procedure does not appear to offer a solution for any structural deficits that remain after additional facilities have been made available, or after the liberalization prescribed by the Treaty of Montevideo has been fully implemented. In particular, the granting of trade facilities does not by itself guarantee that intra-area trade will start flowing in the desired direction and in the amount required. Possibly, a deficit country is producing certain commodities that could potentially be exported, but the pull of its domestic market may be too strong. Also, production facilities and export diversification in a deficit country may be inadequate; in that case, trade liberalization by itself will probably not be sufficient to generate them.

In view of the foregoing, it appears that the mutual credit system may afford some initial flexibility, as the bilateral credits did, but that it will not guarantee the revolving nature of the credits concerned. In that event, any relief offered by the system would be temporary, and the final objectives would not be achieved. The philosophy embodied in the principle of reciprocity, according to which corrective action should be brought about by an expansion of demand in the surplus countries rather than a reduction in the deficit countries, would have saved bilateralism, if it had proven to be practicable. In fact, and efforts to the contrary notwithstanding, when bilateral credits became frozen, resort to increased restrictions by the debtors generally became necessary.

Therefore, one of the objections which may be voiced respecting the establishment of a fully automatic credit system is that it has no built-in deterrents which would cause debtors to use their credit lines slowly and sparingly, and it does not put pressure on them to repay their debts, once the credit has been used. It appears, however, that the adoption of semiautomatic credits requiring debtors to curb their propensity to import cannot be easily combined with the principle of reciprocity. The responsibility for maintaining equilibrium can hardly be shared. If the debtors must protect their own positions in the group, and if they are not allowed by the escape clauses of the Treaty of Montevideo to introduce trade restrictions, except under special conditions and for limited periods, their only remedy is to bring their demand within the limits dictated by their balance of payments positions, by internal measures of restraint, or by exchange rate adjustment. This does not rule out the possibility of trade facilities being extended by the surplus countries, but such action would then assume an accessory nature, and would no longer be the sole or even the principal instrument of adjustment.

The emphasis given to the principle of reciprocity and to the corollaries flowing from it may be seen as an attempt to solve the problems of Latin American development and of the area’s progress toward a common market without reference to other problems that may face the countries concerned. It starts from the assumption that the countries can organize their cooperation, unaffected by problems that impinge upon their internal situations or upon their relations with countries outside the area. The mutual credit system is devised to bring about the insulation of the two sets of problems, and constitutes an effort to solve one independently of the other.

Within the principles as outlined, the system of mutual credits admits few major compromises. It requires ample credit facilities, in order to remove any inhibitions on the part of the deficit countries in their progress toward economic integration. Even the introduction of deterrents against the imprudent use of credit facilities would tear this fabric, since it would compel the debtor countries to be guided by global balance of payments considerations rather than by purely regional considerations. The use of outside rather than mutual credit would equally destroy the concept, since obviously outside creditors could not be involved in a repayment procedure based on the principle that creditors must increase their imports, so as to enable the borrowing countries to discharge their debts. Thus, in the concept of Latin American integration based on the principle of reciprocity, soft currency settlements for intra-area trade, the automatic use of mutual credit for this purpose, and the obligation of surplus countries to expand trade facilities in order to enable deficit countries to increase their exports, are all logically interrelated. If one of these elements is found to be impracticable, the others cease to be meaningful.

Clearing House based on outside credit

A Clearing House based on outside credit, quite apart from technical distinctions, would differ in its policy implications from a mutual credit arrangement. Perhaps its most important distinguishing feature would be that the deficit countries would have the ultimate responsibility for repaying the funds initially borrowed. Prima facie, it appears unlikely that any outside lender would be willing to supply ample credit facilities for indefinite periods while accepting repayment in commodities rather than in free currency. Outside credit, therefore, would probably be more exacting on the deficit countries than mutual credit.

It is unlikely that outside credit would achieve the separation of regional problems from internal and extraregional events. Outside credit made available for the establishment of a Clearing House would not be essentially different from any other credit arrangement that ultimately required credit recipients to make repayment in a currency acceptable to the lenders. Its main feature would be the establishment of a technique of credit apportionment with respect to funds that an outside lender would be willing to make available to a group of Latin American countries, rather than to countries individually. Countries availing themselves of such credits would have to follow economic policies that would enable them to make repayments in accordance with the conditions agreed at the time when the credits were extended.

A Clearing House based on outside credit would not necessarily be confined to the purpose of advancing Latin American integration while ignoring all problems in the area arising in different contexts. Triffin’s proposal rejects the suggestion that individual countries should attempt to maintain regional balance, and thereby discards the principle of reciprocity. His main purpose is to provide medium-term credit to countries willing to introduce programs of economic stabilization. The credits, which are to be negotiated on a discretionary basis, would be extended in accordance with the merits of each case. They would thus be related only loosely to the clearing results that had been achieved previously.

All this appears to lead to the question whether there is much reason for a credit offered by outside sources to be distributed in conjunction with a clearing procedure. As previously indicated, there is little sentiment in favor of such a procedure for its own sake, and its possible technical merits are limited at best. In connection with the principle of reciprocity, clearing positions are the indispensable indicators showing which countries qualify for the use of credit and which must introduce additional trade liberalization. This does not apply to a Clearing House working with outside credit. Furthermore, if attempts to establish regional balance are considered undesirable, it may be asked why the incidence of a regional imbalance should be used as a criterion (even though a tentative one) for apportioning credit among a group of countries.

There is no evidence that the establishment of a Clearing House would persuade lenders outside the Latin American area to offer credit in excess of what would otherwise be available. Accordingly, Clearing House credit, if offered from the outside, would not necessarily be additional to credit facilities that might be obtained in different forms. In view of the many uncertainties surrounding the possible establishment of a Clearing House, it may well be that the negotiation of credits not connected with a clearing procedure could be arranged more easily, and that such credits would prove to be at least equally effective.

VIII. Latin American Payments Problem Compared with European Problem of the 1950’s

Advocates of a Latin American Clearing House frequently refer to the European situation of the early 1950’s, and suggest that the experience gained through the EPU might prove valuable for the solution of some of the present Latin American payments problems. They point out that the EPU fulfilled the technical functions of a Clearing House with credit facilities, and also that it was instrumental in helping the European countries to progress toward convertibility. From this, they infer that a similar organization is likely to play a useful role in Latin America. There are, however, many important differences between the problems faced by Europe in 1950 and those presently existing in Latin America.

In 1950, Europe had reached the point where its payments arrangements had to take either a step forward or a serious step backward. The network of bilateral payments agreements in Europe, set up after World War II, had run into serious difficulties in 1948 and had subsequently been kept operative, to a small extent, by bilateral compensation of agreement balances and, more importantly, by the injection of drawing rights based on conditional U.S. aid. When the European countries were informed that the latter system would be discontinued after the middle of 1950, they were faced with a choice between relapsing into more severe bilateralism or reaching agreement about a payments system that would lead them toward greater multilateralization.

By 1950, productive facilities in Europe had been extensively restored. The main preoccupation at the time was to create conditions under which European trade might flow without hindrance and to avoid the recurrence of a payments system likely to stifle intra-area trade. The multilateralization of payments relations resulting from the establishment of the EPU removed the need for bilateral trade balancing, which had previously contributed to the tightening of discriminatory trade restrictions. The introduction of multilateral settlements made it possible to adopt the principle of nondiscriminatory treatment for intra-European trade and to extend it to all countries taking part in the scheme. On the basis of widespread exchange rate corrections introduced in the autumn of 1949, a process of intra-European trade liberalization had been started in early 1950. This process was accelerated under the auspices of EPU.

The flexibility of this system was assured by a schedule of quotas, indicating the limits within which rules of settlement short of full hard currency payment applied. The conditions under which deficit countries could have recourse to the credit facilities at their disposal contained important incentives for the avoidance of excessive imbalance. Initially, in order to finance an accumulated deficit beyond the first 20 per cent of a member’s quota, the debtor country could claim partial credit provided it made at the same time partial payment in gold or dollars. The credit percentage decreased and the gold or dollar percentage increased as the debtor found itself in higher tranches of the quota. This arrangement was introduced for three reasons. First, it abolished the bilateral practice under which payments were entirely soft within the quota and became entirely hard as soon as the ceiling was exceeded. Thus, under bilateralism debtor countries had generally felt free to apply liberal trade policies while the credit lasted, but had abruptly shifted to highly restrictive commercial policies as soon as the credit ran out. Second, this EPU arrangement allowed debtor countries to recover, as their cumulative position reversed, the gold or dollars paid by them previously. Under bilateral arrangements, this recovery process did not start until an extreme debtor position had been changed into an extreme creditor position. Third, the arrangement constituted a reasonable deterrent to debtors against imprudent use of the credit facilities and an inducement to creditors to accept bigger quotas. Debtors were entitled to receive credit automatically, but they had an interest in preventing too liberal recourse to the facility, since increasing use of the credit was attended by hard currency payments increasing at an even faster rate. Conversely, creditors could be persuaded to make larger credits available than they might otherwise have been willing to extend, since, after the first 20 per cent credit tranche, they would receive gold or dollars pari passu with any credit given. In 1954, and again in 1955, EPU reduced the credit portion of its settlements and correspondingly increased its gold or dollar percentages. Also, starting in 1954, the EPU countries worked out a number of voluntary debt amortization agreements, which reopened credit facilities for future EPU settlements.

Experience in Europe showed that the mixture of credit and dollar payments, tending toward increasing hardness of EPU settlements, struck the right balance between flexibility and monetary discipline. Anti-inflationary policies adopted to avoid, or where necessary to correct, extreme debtor positions in EPU at the same time served to improve countries’ over-all balance of payments positions. In this manner, EPU assisted the return to the general convertibility of currencies.

Before World War II, the share of intra-European trade in total imports of the area had been about 40 per cent. In 1947 this share was down to 25 per cent, but by 1951 it was back to its prewar level.10

Present conditions in Latin America differ in many respects from the European situation described above. Latin American countries in general face payments difficulties, but the main problems do not appear to be due to the technical aspects of the existing payments system. Bilateralism in Latin America is all but abolished, and relapse into bilateralism is by no means an unavoidable alternative if the Latin American countries do not reach early agreement on a new payments system. This was not true of Europe in 1950.

A Clearing House in Latin America would not primarily be intended to prevent existing trade channels from being obstructed, and this, also, is contrary to the experience in Europe before the EPU was set up. The Latin American problem is to open up export channels for commodities which themselves will not become available until appropriate productive facilities have been created or improved. In this sense, the objectives in the field of commerce and production which a Latin American payments system attempts to achieve go well beyond those pursued by EPU.

A study made by ECLA some years ago analyzed the growth prospects of intra-Latin American trade for the period 1955-75, calculated on the basis of assumptions set out in detail.11 In 1954-56, intra-Latin American trade amounted to the equivalent of US$756 million, and represented about 10 per cent of total Latin American imports. The ECLA study anticipated, given reasonable fulfillment of the basic assumptions, that by 1975 intra-Latin American trade might rise to $8,337 million, with an important shift in favor of machinery, equipment, and chemicals and with a much reduced emphasis on staple agricultural commodities. ECLA expected that, by that time, the share of intra-Latin American trade in total imports of the area would have risen to 48 per cent. However, no payments system can play the major part in achieving these results, and the success of the common market must depend on the fulfillment of many other conditions.

In Latin America, so far, discussions about the possible establishment of a Clearing House have focused on the broad principles involved, but no attempts have been made to reach agreement about the scope of the credit facilities that countries would have to extend in order to turn a Clearing House into a workable arrangement. The amounts that could prudently be lent by countries expected to register surpluses in intra-area trade are definitely limited, and the Treaty of Montevideo does not appear to offer any great inducement toward the extension of even such limited credits.

At the time of its inception, EPU was able to strike a balance between the credit facilities made available to debtors and the deterrents against precipitate use of those facilities. The type of Clearing House generally suggested for Latin America does not contain such deterrents, and their introduction might not be easy. If the deterrent were too weak, the credit would be promptly used by debtor countries. If it were too strong, the credit would be virtually unavailable and there would be no impact on trade liberalization. In Europe in 1950 it was possible, for two reasons, to agree on a deterrent that was meaningful. First, the debtor countries felt that the amount of credit available would help them, even if it were obtained at the expense of a certain amount of reserves. This means that the deterrent slowed them down, but did not inhibit them from using the credit. Second, the debtors assumed responsibility for their deficits and took measures aimed at reversing debtor positions that threatened to become excessive.

In Latin America today, debtor countries whose foreign reserve positions are inadequate may well find it difficult to agree to disincentives in the form of a loss of reserves attending the use of Clearing House credit. In addition, the principle of reciprocity places responsibility for maintaining regional balance on the creditor rather than on the debtor countries.

Furthermore, there also exist technical differences between Europe’s situation in 1950 and the present position of Latin America. Europe was not encumbered by multiple rate systems and fluctuating rates, which a Clearing House can handle only with difficulty. The payments technique established under EPU constituted a step away from a more restricted payments system and a step toward convertibility. In Latin America, at least some countries feel that a Clearing House would require them to introduce controls and, possibly, restrictions; and there is reason to believe that this would be almost unavoidable if the clearing arrangement should provide for automatic credit. In Europe, the new technique made it possible for the commercial banks to become increasingly involved in international payments, and for normal exchange market arrangements, including forward facilities and spot and forward arbitrage, to be restored. At least some of the techniques proposed for Latin America appear to require an elimination of normal banking channels.

Most importantly perhaps, the preamble to the EPU agreement recognized the need to achieve and maintain internal financial stability, and the EPU provisions contained the techniques and the policy instruments to enforce the necessary discipline. This may well be the most significant difference between EPU and the proposals for a Clearing House inspired by the principle of reciprocity.

Rôle possible d’une chambre de compensation dans le marché régional latino-américain

Résumé

On a débattu plus d’une fois par le passé dans de nombreuses conférences latino-américaines l’utilité de l’établissement d’une chambre de compensation en Amérique latine. Le présent article est une étude indépendante faite sur le sujet à la requête du Centre pour les Etudes Monétaires Latino-Américaines par deux membres des services du Fonds.

Les auteurs n’ont pas examiné le problème du point de vue d’une “philosophie” monétaire mais l’ont plutôt abordé d’un point de vue technique. Ils ont tout d’abord analysé la technique actuelle de règlements dans la zone latino-américaine, puis ils ont essayé d’évaluer les changements que l’établissement d’une chambre de compensation ou d’un organisme similaire pourraient produire, et ils ont finalement pesé les problèmes connexes qui devraient être résolus avant qu’un organisme de ce genre puisse vraisemblablement commencer à fonctionner. Ils ont eu le privilège de recueillir une grande variété d’opinions sur la question, opinions exprimées par des personnages officiels, des banquiers, des commerçants, etc… d’Amérique latine. Ils ont également essayé d’évaluer la présente Chambre de compensation d’Amérique centrale en tant que prototype possible d’un organisme similaire qui desservirait une zone plus étendue et ils ont examiné des suggestions effectuées par le Professeur Triffin et par le Secrétariat de la Commission Economique pour l’Amérique latine pour de nouveaux accords de paiement.

On a considéré plusieurs types de chambre de compensation. L’un de ceux-ci qui ne couvrirait que des sommes marginales de crédit affecterait principalement le mécanisme actuel des paiements et aurait très peu d’influence sur le commerce dans cette zone. D’autres systèmes impliquant un élément de crédit considérable pourraient vraisemblablement avoir un plus grand effet sur le commerce, mais ils pourraient susciter des problèmes nombreux et difficiles à résoudre. Leur réalisation, dans la pratique, et leur influence dépendraient largement de l’origine de ce crédit, c’est-à-dire du fait que celui-ci serait demandé à des prêteurs se trouvant en dehors de l’Amérique latine ou au contraire serait fourni par des membres mêmes du groupe latino-américain. En tout cas, la répartition du crédit et le maintien de sa nature renouvelable impliqueraient des décisions difficiles.

El papel que podría desempeñar una cámara de compensación en el mercado regional de América Latina

Resumen

En muchas conferencias de América Latina en el pasado se han debatido las razones que favorecerían la creación de una cámara de compensación latinoamericana. El presente artículo ofrece un estudio de carácter independiente sobre dicho tema realizado por dos miembros del personal del Fondo a petición del Centro de Estudios Monetarios Latinoamericanos.

Los autores de este artículo no han examinado el problema en términos de la filosofía monetaria, sino que lo han enfocado desde un punto de vista técnico. Primero han analizado el sistema actual para las liquidaciones intra-latinoamericanas; luego han procurado evaluar aquellos cambios que podría entrañar la creación de una cámara de compensación u otra institución similar, y, por último, han medido los problemas conexos que habría que resolver antes de que pudiese ponerse en marcha dicha institución. Han podido aprovechar una vasta gama de criterios que les han sido expuestos por funcionarios públicos, banqueros, comerciantes y otras personas de la América Latina. También han tratado de considerar los méritos que reúne la actual Cámara de Compensación Centroamericana como posible prototipo de una institución análoga que abarque a una zona más extensa, y han estudiado las sugestiones formuladas por el Profesor Triffin y por la Secretaría de la Comisión Económica para América Latina en cuanto a un nuevo sistema de pagos.

Varios tipos de cámaras de compensación se han tomado en consideración. Un tipo que involucrara únicamente sumas marginales de crédito afectaría principalmente a la mecánica actual de los pagos y repercutiría en forma muy limitada sobre el comercio efectuado dentro de la región. Es concebible que otros sistemas alternativos que entrañaran un elemento de crédito considerable surtirían mayor efecto sobre el comercio, pero tal vez acarrearían numerosos problemas de difícil solución. Su factibilidad y sus efectos dependerían en gran medida de si los préstamos habrían de obtenerse de fuentes situadas fuera de América Latina o provenir de los mismos miembros que integran el sector latinoamericano. De cualquier manera, la distribución de los préstamos y la conservación de su carácter rotatorio involucrarían decisiones difíciles.

*

Mr. Keesing, Advisor in the Exchange Restrictions Department, is a graduate of Amsterdam University. He was formerly an Advisor in the Netherlands Ministry of Finance and professor of economics at the University of Amsterdam.

Mr. Brand, Advisor in the Western Hemisphere Department, is a graduate of New York University (Finance) and George Washington University (Law). Prior to his employment with the Fund, he was connected with the U. S. Treasury Department and with commercial banking institutions.

1

Reported in CEMLA, Técnicas Financieras. Vol. II, No. 1, September-October 1962.

2

“Realizaciones y Perspectivas en el Proceso del Mercado Regional.”

3

Costa Rica became a member of the Clearing House in June 1963. It has not been possible to incorporate in this paper any further information on its participation.

4

The first agreement also covered payments in Nicaraguan córdobas, but since then Nicaragua has eliminated its residual exchange restrictions.

5

The term “border trade” does not necessarily denote commerce confined to a narrow strip; in practice, banknotes of one Central American country may frequently be accepted in a considerable area of an adjacent country.

6

See, inter alia, United Nations, Economic Commission for Latin America, The Latin American Common Market (1959) and Papers on Financial Problems Prepared for the Use of the Latin American Free Trade Association (1961).

7

Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, and Uruguay.

8

The converse situation might also arise; but from the point of view of the liquidity of the Clearing House, it would present no problem.

9

Article 11 of the Treaty of Montevideo (in translation) reads as follows: “If, as a result of the concessions granted, significant and persistent disadvantages are created in respect of trade between one Contracting Party and the others as a whole in the products included in the liberalization program, the Contracting Parties shall, at the request of the Contracting Party affected, consider steps to remedy these disadvantages with a view to the adoption of suitable, nonrestrictive measures designed to promote trade at the highest possible levels.”

10

Figures based on Organization for European Economic Cooperation, Foreign Trade Statistical Bulletin: Foreign Trade by Areas.

11

The Latin American Common Market (cited above, fn. 6), Part B, “Influence of the Common Market on Latin American Economic Development.”

IMF Staff Papers: Volume 10, No. 3
Author: International Monetary Fund. Research Dept.